Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina, South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:
The first (plan A) is an all- common-equity capital structure. 2.5 million dollars would be raised by selling common stock at $20 per common share.
Plan B would involve the use of financial leverage. $1.3 million dollars would be raised by selling bonds with an effective interest rate of 10.6% (per annum), and the remaining $1.2 million would be A 30% tax rate is deemed appropriate for the analysis.
a. Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar)