Business & Finance
Price: $5 USD

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)

Tutor Answer

(Top Tutor) Daniel C.
School: Boston College
Studypool has helped 1,244,100 students
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1827 tutors are online

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors