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Abe Forrester and three of his friends fro…

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, Huston, and San Antonio. To finance the new venture two plans have been proposed: Plan A is an all-common-equity structure in which $2.1 million dollars would be raised by selling 88,000 shares of common stock. Plan B would involve issuing $1.3 million dollars in long-term bonds with an effective interest rate of 12.2% plus $0.8 million would be raised by selling 44,000 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 35% tax rate with 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. (Round to the nearest dollar.) (B) Prepare a pro forma income statement for the EBIT level solved for in part a. that shows that the EPS will be the same regardless whether Plan A or Plan B is chosen. (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)

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