Find the ebit indifference level associated

Assignment Help Financial Management

Reference no: EM131625136

Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in? Dallas, Houston, and San Antonio. To finance the new venture two plans have been? proposed: bullet

• Plan A is an? all-common-equity structure in which ?$2.42.4 million dollars would be raised by selling 84 comma 00084,000 shares of common stock. bullet.

• Plan B would involve issuing ?$1.31.3 million in? long-term bonds with an effective interest rate of 11.611.6 percent plus another $ 1.1$1.1 million would be raised by selling 42 comma 00042,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity? date, in that this amount of financial leverage is considered a permanent part of the? firm's capital structure. Abe and his partners plan to use a 4040 percent tax rate in their? analysis, and they have hired you on a consulting basis to do the? following:

a. Find the EBIT indifference level associated with the two financing plans.

b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.

a. The EBIT indifference level associated with the two financing plans is ?$ nothing. ?(Round to the nearest? dollar.)

b. Complete the segment of the income statement for Plan A? below: ?(Round income statement amounts to the nearest dollar except the EPS to the nearest? cent.) Stock Plan EBIT $ Less: Interest Expense Earnings Before Taxes $ Less: Taxes at 40% Net Income $ Number of Common Shares EPS $ Complete the segment of the income statement for Plan B? below: ?(Round income statement amounts to the nearest dollar except the EPS to the nearest? cent.) Bond/Stock Plan EBIT $ Less: Interest Expense Earnings Before Taxes $ Less: Taxes at 40% Net Income $ Number of Common Shares EPS $

Reference no: EM131625136

Questions Cloud

Open the account and promptly forget about the account : You make an initial deposit of $2500 to open the account and promptly forget about the account, never making another deposit.

What is the value of the common stock : what is the value of the common stock if the investors require a rate of return of 19 ?percent?

What are the upper and lower limits for trading at base rate : DBC Company Inc., imports equipment from LPD Company located in Germany. What are the upper and lower limits for trading at the base rate?

Industry average ratios-construct pro forma balance sheet : Use the following industry average ratios, to construct a pro forma balance sheet, for Mendoza Distributors, Inc. The company's fixed assets are $ nothing

Find the ebit indifference level associated : Find the EBIT indifference level associated with the two financing plans.

Using the basic accounting equation : Using the Basic Accounting Equation. what is the end-of-year total stockholders’ equity?

The governments superannuation guarantee scheme : What was the purpose of the introduction of compulsory superannuation contributions and the governments superannuation guarantee scheme?

What is depreciation tax shield for project in year five : What is the depreciation tax shield for this project in year 5?

Calculate its weighted average cost of capital : Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital.

User Account

All Pages