week4/5 (EBIT-EPS analysis) Mark and three of his friends from college have inte
ID: 2693109 • 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 $2.4 million dollars would be raised be selling 84,000 shares of common stock.PLAN B would involve issuing $1.2 million dollars in long-term bonds with an effective interest rate of 11.8% plus $1.2 million would be raised by selling 42,000 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 34% 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_$283200___(round to the nearest dollar) 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
PART B
GIVEN, ebit 283200
Plan A:
ebit 283200
less:interest exspense 0
earnings before taxes 283200
less:Taxes at 34% 96288
net income 186912
number of ommon shares 84000
eps 2.225
Plan B:
ebit 283200
less:interest exspense 141600
earnings before taxes 141600
less:Taxes at 34% 48144
net income 93456
number of ommon shares 42000
eps 2.225
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