Abe Forrester and three of his friends from college haveinterested a group of venture capitalists in backing their businessidea. The proposed operation would consist of a series of retailoutlets to distribute and service a full line of vacuum cleanersand accessories. These stores would be located in Dallas, Houston,and San Antonio. To finance the new venture two plans have beenproposed:
Plan A is an all-common-equity structure in which $2.1 milliondollars would be raised by selling84,000 shares of commonstock.
Plan B would involve issuing
$1.1 million in long-term bonds with an effective interestrate of 12.1 percent plus another $1.0 million would be raised byselling 42,000
shares of common stock. The debt funds raised under Plan B haveno fixed maturity date, in that this amount of financial leverageis considered a permanent part of the firm’s capitalstructure.
Abe and his partners plan to use a 38 percent tax rate in theiranalysis, and they have hired you on a consulting basis to do thefollowing:
a. The EBIT indifference level associated with the twofinancing plans is
$_____
(Round to the nearest dollar.)
b. Complete the segment of the income statement for Plan Abelow: (Round income statement amounts to the nearest dollarexcept the EPS to the nearest cent.)
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