FIN 302 [EBlT-EPS analysis] Three recent graduates

Subject: Business / Finance
Question
[EBlT-EPS analysis] 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 soulhem region of Tennessee, Georgia. North Carolina. and South Carolina. Asmall group
of private investors in the Atlanta, Georgia area is interested in ?nancing the startup company and two ?nancing plans have been put forth for consideration: – The ?rst [Plan A} is en all-common-equlty capital structure. $2.1 million dollars would be raised by selling common stock at $20 per common share. – Plan B would Involve the use of ?nancial leverage. $1.3 million dollars would be raised by selling bonds with an effective interest rate of 10.8 percent (per annum).
and the remaining $0.3 million would be raised by selling common stock at the $25 price per share. The use of ?nancial leverage is considered to be a permanent part of
the ?n’n’s capitalization. so no ?xed maturity date is needed for the analysis. A 35 percent tax rate is deemed appropriate for the analysis. a. Find the EBIT indifference level associated with the two ?nancing plans.
In. A detailed ?nancial analysis of the ?rm’s prospects suggests that the long-term EBIT will be above $323,000 annually. Taking this into consideration, which plan will generate the higher EPS? a. The EBlT indifference level associated with the two ?nancing plans is $ . (Round to the nearest dollar.)

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