(EBIT-EPS analysis) Abe Forrester and three of his friends from college have int
ID: 2702945 • Letter: #
Question
(EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalist in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Explanation / Answer
A)
EBIT indifference=
[(EBIT-0)x.6]/90000= [(EBIT-154700)x.6]/45000
EBIT/90000= (EBIT-154700)/45000
EBIT/2= EBIT-154700
EBIT= 2EBIT-309400
EBIT= $309400
B)
pro forma income statement for Plan A:
EBIT= $309400
Interest=0
EBT= 309400
Tax= 123760
EAT= 185640
no of shares= 90000
EPS= EAT/no of shares
EPS= 185640/90000= 2.063
EPS= 2.063
pro forma income statement for Plan B:
EBIT= $309400
Interest=154700
EBT= 154700
Tax= 61880
EAT= 92820
no of shares= 45000
EPS= EAT/no of shares
EPS= 92820/45000= 2.063
EPS= 2.063
The EBIT indifference level associated with the two financing plans is $309400
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