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 forth for consideration: The first plan (plan A) is an all-common-equity capital structure. 2.1 million dollars would be raised by selling common stock at $10 per common share Plan B would involve the use of financial leverage. 1.2 million dollars would be raised by selling bonds with an effective interest rate of 10.5% (per annum) and the remaining $0.9 million would be raised by selling common stock at the $10 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 analysis. A 30% tax rate is deemed appropriate for the analysis. A. Find the EBIT indifference level associated with the two financial plans. (nearest $) B. A detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $332,000 annually. Taking this into consideration, which plan will generate the higher EPS?
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