1. (EBIT-EPS analysis) Abe Forrester and three of his friends from college have
ID: 2702952 • Letter: 1
Question
1. (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.66]/84000= [(EBIT-150800)x.66]/42000
EBIT/84000= (EBIT-150800)/42000
EBIT/2= EBIT-150800
EBIT= 2EBIT-301600
EBIT= $301600
B)
pro forma income statement for Plan A:
EBIT= $301600
Interest=0
EBT= 301600
Tax= 102544
EAT= 199056
no of shares= 84000
EPS= EAT/no of shares
EPS= 199056/84000= 2.3697 0r 2.37
EPS= 2.37
pro forma income statement for Plan B:
EBIT= $301600
Interest=150800
EBT= 150800
Tax= 51272
EAT= 99528
no of shares= 42000
EPS= EAT/no of shares
EPS= 99528/42000= 2.3697 0r 2.37
EPS= 2.37
The EBIT indifference level associated with the two financing plans is $301600
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