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Question description
Please explain how to calculate the EBIT in the following problem:
(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 proprosed:
Plan A is all common-equity- structure in which 2.3 million dollars would be raised by selling 84,000 shares of common stock.
Plan B would involve issuing $1.1 million dollars in long term bonds with an effective interest rate
of 11.6%
plus $1.2 million would be raised by selling 42,000
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 34% 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. Find the EBIT indifference level associated with the two financing plans.
The EBIT indifference level associated with the two financial plans is $__?
(Round to the nearest dollar)

 

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