Reference no: EM13268997

Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina, and South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration: The first (Plan A) is an all-common-equity capital structure. $2.4 million dollars would be raised by selling common stock at $20 per common share. Plan B would involve the use of financial leverage. $1.1 million dollars would be raised by selling bonds with an effective interest rate of 11.2% (per annum), and the remaining $1.3 million would be raised by selling common stock at the $20 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis. a. Find the EBIT indifference level associated with the two financing plans. (Round the nearest dollar.) b. A detailed financial analysis of the firm's prospects suggests that the long-term EBIT will be above $344,000 annually. Taking this into consideration, which plan will generate the higher EPS? (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)