(EBIT-EPS analysis) Three recent graduates of the computer science program at th
ID: 2702963 • 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 Indifference point among plan 1 and plan 2 Eps of plan 1 = Eps of plan2 Let EBIT of both options be x x(1-0.34)/240000 = (x-123200)(1-0.34)/130000 solving for x , we get x = $268,800 Hence EBIT of both options will be = $268,800 B Plan1 EBIT = $300,000 EAT = $198,000 No of shares = 240000 EPS = $1.25 Plan 2 EBIT $300,000 LESS:interest = $123,200 EBT $176,800 EAT = $116,688 No. of shares = 130000 EPS = $0.90 Since EPS of plan 1 is higher ,hence plan 1 should be chosen
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