Abe Forrester and three of his friends from college have interested a croup fo v
ID: 2697831 • Letter: A
Question
Abe Forrester and three of his friends from college have interested a croup fo 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 Antonia. To finance the new venture two plans have been proposed. Plan A is an all common equity structure in which $2.4 million dollars would be raised by selling 82,000 shares of common stock. Plan B would involve issuing $1.2 million dollars in long term bonds with an effective interest rate of 12.4% plus $1.2 million would be raised by selling 41,000 shares of common stock. The debt funds raised under Abe and his partners plan to use a 40% 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.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Explanation / Answer
5.07