. (EBIT-EPS analysis) Two incentive entrepreneurs have interested a group of ven

Question

. (EBIT-EPS analysis) Two incentive entrepreneurs have interested a group of venture capitalists in backing a new business project. The proposed plan would consist of a series of international retail outlets to distribute and service a full line of ingenious home garden tools. The stores would be located in high-traffic cities in Latin America such as Panama City, Bogota, Sao Paulo, and Buenos Aires. Two financing plans have been proposed by the entrepreneurs. Plan A is an all-common-equity structure. Five million dollars would be raised by selling 160,000 shares of common stock. Plan B would involve the use of long-term debt financing. Three million dollars would be raised by marketing bonds with an effective interest rate of 14 percent. Under the alternative, another $2 million would be raised by 64,000 shares of common stock. With both plans, $5 million is needed to launch the new firm

Explanation / Answer

(EBIT -0)/160,000 = (EBIT - 3*14%)/64,000 EBIT = 2.5EBIT - 1.05 EBIT = $700,000 EBIT indifference level = $700,000

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