Find the ebit indifference level associated

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Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful businesses. The proposed plan for their latest effort involves a series of international retail outlets to distribute and service a full line of ingenious home garden tools. The stores would be located inhigh-traffic cities in Latin America such as PanamaCity, Bogotá,São Paulo, and Buenos Aires. The entrepreneurs have proposed two financing plans. Plan A is an allcommon-equity structure. Five million dollars would be raised by selling 500,000 shares of common stock. Plan B would involve the use oflong-term debt financing. Three million dollars would be raised by marketing bonds with an effective interest rate of 17 percent. Under planB, another$2 million would be raised by selling 200,000 shares of common stock. With bothplans, $5 million is needed to launch the newfirm's operations. The debt funds raised under plan B are considered to have no fixed maturitydate, because this portion of financial leverage is thought to be a permanent part of thecompany's capital structure. The two promising entrepreneurs have decided to use a 32 percent tax rate in theiranalysis, and they have hired you on a consulting basis to do the following:

a. Find the EBIT indifference level associated with the two financing proposals.

b. Prepare income statements for the two plans that prove EPS will be the same regardless of the plan chosen at the EBIT level found in part (a).

Reference no: EM131412256

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