Abe Forrester and three of his friends from college have interested 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 2.3 millions dollars would be raised by selling 84,000 shares of common stock.
Plan B would involve issuing $1.3 millions dollars in long-term bonds with an effective interest rate of 11.6% plus $1.0 million woiuld be raised by selling 42000 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 parteners 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.
The EBIT indifference level associated with the two financing plans is (round to nearest dollar)

Plan Plan

Shares of Equity 84,000

Debt 0

Cost of debt 0

Interest Expense 0

Tax Rate 35%

B. Prepare a pro forma income statement
for the EBIT level solved for in Part A that shows that eps will be the same
regardless whether Plan A or B is chosen