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How to figure out EBIT-EPS
Asked Apr 26, 2008, 02:31 PM
I am so confused about how to solve the following problems in my Financial Mgmnt class.
If anyone is an expert in accounting please help me figure it out.
Problem 12.2 (EBIT-EPS Analysis) Two inventive Entrepreneurs have interested a group of venture capitalists in backing a new business project.
Plan A: is an all Common-Equity Structure. $5 million would be raised by selling 160K shares of common stock.
Plan B: would involve the use of Long-Term Debt financing. $3 million would be raised by marketing bonds with an effective interest rate of 14%. Under the alternative, another $2 million would be raised by selling 64k shares of common stock. The Debt Funds under Plan B are considered to have not fixed maturity date, because this portion of Financial Leverage is thought to be a permanent part of the companyís capital structure.
With both plans $5 million would be needed to launch the new firmís operations.
a. Find the EBIT indifference level with the two financing proposals.
b.Prepare Income statements for the two plans that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a.