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2 inventive entrepreneurs have interested the group of venture capitalists in backing new business project. Proposed plan would comprise of a sequence of international retail outlets to allocate and service the full line of inventive home garden tools. Stores would be located in high-traffic cities in Latin America like Panama City, Bogotá, São Paulo, and Buenos Aires. 2 financing plans have been suggested by entrepreneurs. Plan A is all-common-equity structure. 5 million dollars would be increased by selling= 100,000 shares of common stock. Plan B would engage= use of long-term debt financing. 3 million dollars would be increased by marketing bonds with the effective interest rate of 13%. Under alternative, another $2 million would be increased by selling= 40,000 shares of common stock. With both plans, $5 million is required to launch new firm’s operations. Debt funds increased under plan B are considered to have no fixed maturity date, as this portion of financial leverage is thought to be permanent part of company’s capital structure. 2 promising entrepreneurs have decided to utilize a 33% tax rate in their analysis, and they have hired you on the consulting basis to perform the following:

i) Determine the EBIT indifference level related with 2 financing proposals.

ii) Make income statements for the 2 plans which proves EPS will be same regardless of plan selected at EBIT level found in part i.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914727

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