week4/5 (EBIT-EPS analysis) Mark and three of his friends from college have inte
ID: 2693046 • Letter: W
Question
week4/5 (EBIT-EPS analysis) Mark and three of his friends from college have interested a group of venture capilists 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 Antonia.To finance the new venture two plans have been proposed. PLAN A is an all-common-equity structure in which $2.1 million dollars would be raised be selling 86,000 shares of common stock.PLAN B would involve issuing $1.2 million dollars in long-term bonds with an effective interest rate of 12.1% plus $0.9 million would be raised by selling 43,000 shares of common stock.The debt funds raised under PLAN B no fixed maturity date,in that Mark and his partners plan to use a 38% tax rate in their analysis,and they have hired you on a consulting basis to do the following: FIND THE EBIT INDIFFERENCE LEVEL ASSOCIATED WITH THE TWO FINANCING PLANS_$_290400__(round to the nearest dollar) _______________________________________________________________________________________ (PART B) Prepare a pro forma income statement for the ebit level solved for part a that shows that eps will be the same regardless whether plan a or b is chosen stock plan ebit $___ less:interest expense____ earnings before taxes$______ less:taxes at 38% _____ net income$______ number of common shares_______ eps$_________ (round income statement amounts to the nearest dollar except the eps to the nearest centExplanation / Answer
EBIT INDIFFERENCE LEVEL
.62EBIT/86000= {(EBIT-145200).62}/43000
EBIT= $290400
(PART B)
PLAN A:
EBIT 290400
less:interest expense 0
earnings before taxes 290400
less:taxes at 38% 110352
net income 180048
number of common shares 86000
eps( 180048/86000)= 2.094
PLAN B:
pro forma income statement
ebit 290400
less:interest expense 145200
earnings before taxes 145200
less:taxes at 38% 55176
net income 90024
number of common shares 43000
eps(90024/43000)= 2.094
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