Three recent graduates of the computer science program

Three recent graduates of the computer science program

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 and South Carolina. A small group of private investigators in 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-in common-equity capital structure. $2.3 million dollars would be raised by selling common stock at $20 per common share.

– Plan B would involve the use of financial leverage. $1.4 million dollars would be raised by selling bonds with an effect interest rate of 11.5% (per annum), and the remaining $0.9 million would be raised by selling common stock at the $20 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 30% tax rate is deemed appropriate for the analysis.

Question A: Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar)

Question B: A detailed financial analysis of the firm’s prospects suggests that the long-term EBIT will be above $309,000 annually. Taking this into consideration, which plan will generate the higher EPS?

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

Stock Plan (A)
EBIT ________
Less: Interest Expense ________
Earnings Before Taxes _________
Less: Taxes at 30% ________
Net Income _________
Number of Common Shares __________
EPS ___________

Bond/Stock Plan (B)
EBIT ________
Less: Interest Expense ________
Earnings Before Taxes _________
Less: Taxes at 30% ________
Net Income _________
Number of Common Shares __________
EPS ___________

The plan that will generate the higher EPS is Plan (A/B)?

 

ORDER A SIMILAR ESSAY WRITTEN FROM SCRATCH at : https://www.topgradehub.com/

PLACE YOUR ORDER