Abe Forrester

Abe Forrester and three of his friends from college have interested a group of venture capitalists in the 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 proposed.

Plan A is an all-common-equity structure in which $2.4 million dollars would be raised by selling 82000 shares of common stock.

Plan B would invoice issuing $1.4 million dollars in long term bonds with an effective interest rate of 22.9% plus $1.0 million would be raised by selling 41,000 shares of common stock. The debt funds Abe and his partners plan to use a 40% 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.(round to the nearest dollar)

b.      Prepare a pro forma 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