Question: Abe Forrester and three of his friends from college have

Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing businesses idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line to 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 which $2.1million dollars would be raised by selling 86,000 shares of common stock.
-Plan B would involve issuing $1.1milion dollars in long-term bonds with effective interest rate of 11.8% plus 0.9 million would be raised by selling 41,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this 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 for in Part A. that shows that EPS will be the same regardless whether Plan A or B is chosen.

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  • CreatedJuly 26, 2013
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