# EBIT-EPS analysis problem Here’s the original problem that was listed; 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 \$2.5 million dollars would be raised be 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 \$1.4 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. a. Find the EBIT indifference level associated with the two financing plans. The EBIT indifference level associated with the two financing plans is \$____. (Round to the nearest dollar.)

EBIT-EPS analysis problem

Here’s the original problem that was listed; 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 \$2.5 million dollars would be raised be 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 \$1.4 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.

a. Find the EBIT indifference level associated with the two financing plans.
The EBIT indifference level associated with the two financing plans is \$____. (Round to the nearest dollar.)