Abe Forrester

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Abe Forrester and three of his friends from college have invested a group of venture capitalist 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 Antonio. To finance the new venture two plans have been proposed.

Plan A is an all-common-equity structure in which 2.2 million dollars would be raised by selling 82,000 shares of common stock.

Plan B would involve issuing 1.4 milliom dollars in long-term bonds with an effective interest rate at 11.9% plus 0.8 million would be raised by selling 41,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date in that this amount of financial leverage is considered a permanent part of the firm’s capital structure. Abe, and his friends plan to use a 35% 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.
b) Prepare a pro forma income statement for the EBIT level solved for in part (a). that shows the EPS will be the same regardless whether Plan A, or Plan B is chosen.

a) Find the EBIT indifference level associated with the two financing plans.

The EBIT indifference level associated with the two financing plans is $_____ (round to the nearest dollar)

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