Which plan will generate the higher eps

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Reference no: EM13276248

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. Intially 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 Ga area is interested in finacing the startup company and two financing plans have been put forth for consideration. The first (Plan A) is an all common equity capital structure $2.2 million dollars would be raised by selling common stock at $20 per common share. Plan B would involve the use of financial leverage $1.2 million dollars would be raised by selling bonds with an effective interest rate of 10.6% (per annum) , and the remaining $1.0 million would be raised by selling common stock at $20 price per share. The use of financial leverage is consider to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 30% tax rate is deemed. A.Find the EBIT indifference level associate with the two financing plans. B. A detailed financial analysis of the firm's prospects suggests that the long term EBIT will be above $315,000 annually. Taking this into consideration, which plan will generate the higher EPS?

Reference no: EM13276248

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