Log in

View Full Version : Help with finance homework?


tania7120
Jan 11, 2012, 09:02 AM
I am having an issue solving and catching on to a finance homework question. I have part of it done but am having issues on where to find certain numbers. Here is the question and what I have thus far.


Abe Forrester and three
Of his friends from college have interested a group of venture capitalists 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 million dollars would be raised
By selling 80,000 shares of common stock.
• Plan B would involve issuing $1 million dollars in long-term bonds with an effective
Interest rate of 12% plus another $1 million would be raised by selling 40,000 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 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.

(EBIT-0)*(1-40%) = (EBIT-?)*(1-40%)
80,000 40,000

I am having an issue on where the information is that I put the ? Mark down for. I need some what detail as I do need to understand how to do it!

ArcSine
Jan 13, 2012, 06:17 AM
You're nearly there. Since Plan B calls for 1M in bonds with an interest rate of 12%, the total interest expense (and hence the value for your "?") is 1,000,000 x 0.12 = 120,000.

You can take it from there. You'll need to find a value for EBIT at which that equality is true. Check back in and let me know what you came up with for the EBIT indiff point.

lovelytilltheen
Apr 7, 2012, 08:47 PM
What I don't get is how you get X or the ebit.

lovelytilltheen
Apr 7, 2012, 08:48 PM
You're nearly there. Since Plan B calls for 1M in bonds with an interest rate of 12%, the total interest expense (and hence the value for your "?") is 1,000,000 x 0.12 = 120,000.

You can take it from there. You'll need to find a value for EBIT at which that equality is true. Check back in and let me know what you came up with for the EBIT indiff point.

I am in this class now an I am completely confused.