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(EBIT-EPS analysis) Abe Forrester and three of his friends

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(EBIT-EPS analysis) 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:
• Plan A is an all-common-equity structure in which $2.4 million dollars would be raised
by selling 80,000 shares of common stock.
• Plan B would involve issuing $1.1 million dollars in long-term bonds with an effective
interest rate of 11.9% plus another $1.3 million would be raised by selling 40,000 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 35% 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.
The EBIT indifference level associated with the two fianancing plans is ? Round to the nearest dollar
Submitted: 5 years ago.
Category: Homework
Expert:  Jabi replied 5 years ago.
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Customer: replied 5 years ago.
Expert:  Jabi replied 5 years ago.

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