Find the ebit indifference level
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 $2.4 million dollars would be raised
By selling 86,000 shares of common stock.
Plan B would involve issuing $1.4million dollars in long-term bonds with an effective
Interest rate of 11.7% plus another $1.0 million would be raised by selling 43,000 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
Capital structure.
Abe and his partners plan to use a 38% 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
