week4/6 4 recent graduates of the computer sci program at the university of Mich

Question

week4/6 4 recent graduates of the computer sci program at the university of Michigan 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 Michigan, Georgia ,and Tennessee small group of private investors in Atlanta are interested in financing the start up company and two financing plans have been put fourth for consideration.PLAN A is an all-common equity capital structure.$2.4 million dollars would be raised by selling common stock at $20 per common share.PLAN B would involve the use of leverage.$1.5 million dollars would be raised by selling bonds with n effective interest rate of 10.6%(per annum).and the remaining $0.9 million would be raised be selling common stock at the $20 price per share.The use of financial leverage is considered to be a permanent part of the firms capitalization,so no fixed maturity date is needed for the anaylsis. A 34% tax rate is deemed appropriate for the analysis.FIND THE EBIT INDIFFERENCE LEVEL ASSOCIATED WITH THE TWO FINANCING PLANS$_______(round to the nearest dollar)

Explanation / Answer

EBIT INDIFFERENCE LEVEL ASSOCIATED WITH THE TWO FINANCING PLANS .66EBIT/120000= [.66(EBIT-159000)]/45000 .375 EBIT= EBIT- 159000 Therefore EBIT= $254400

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