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 2.3 million dollars would be raised by selling 88,000 common stock
Plan B would involve issuing 1.5 Million dollars in long term bonds with an a effective interest rate of 12.2% plus $0.8 million would be raised by selling 44,000 share of common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of finance leverage is considered a permanent part of the firms capital structure
ABE and his partners plan to use 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 Plan B is chosen
Fin370 Abe Forrester sum solution