(EBIT-EPS analysis) Three recent graduates of the computer science program at th
ID: 2702955 • Letter: #
Question
(EBIT-EPS analysis) Three recent graduates of the computer science program at the University of Tennessee 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 Tennessee, Georgia, North Carolina, and South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put in forth for consideration:
Explanation / Answer
A)
EBIT indifference=
[(EBIT-0)x.66]/210000= [(EBIT-119900)x.66]/100000
EBIT/210000= (EBIT-119900)/100000
EBIT= 2.1EBIT-251790
251790=2.1EBIT- EBIT
EBIT= $228900
B)
pro forma income statement for Plan A:
EBIT= $228900
Interest=0
EBT= 228900
Tax= 77826
EAT= 151074
no of shares=210000
EPS= EAT/no of shares
EPS= 151074/210000= .7194
EPS= .7194
pro forma income statement for Plan B:
EBIT= $228900
Interest=119900
EBT= 109000
Tax= 37060
EAT= 71940
no of shares= 100000
EPS= EAT/no of shares
EPS= 71940/100000= .7194
EPS= .7194
The EBIT indifference level associated with the two financing plans is $228900
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