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1) A group of retired college professors has determined to form small Manufacturing Corporation. Company will make a full line of conventional office furniture. 2 financing plans have been proposed by investors. Plan A is the all-common-equity alternative. Under this agreement, one million shares will be sold to net firm $30 per share. Plan B involves use of financial leverage. A debt issue with 20-year maturity will be confidentially placed. Debt issue will take the interest rate of 14%, and principal borrowed will amount to= $3 million. Suppose a corporate tax rate of= 42%.

a) Determine EBIT indifference level related with two financing proposals.

b) Make the analytical income statement which proves EPS will be same regardless of plan selected at the EBIT level found in part a.

c) Make the EBIT-EPS analysis chart for this situation.

d) If detailed financial analysis projects that long-term EBIT will always be close to $4.7 million annually, which plan will give for higher EPS?

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  • Category:- Basic Finance
  • Reference No.:- M914676

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