Question Details

Please EXPLAIN how you get the answer to the following equation. ?I am stuck on simple math / algebra where I set each equation to equal one another.

1) Plan A is an all-common-equity structure in which 2.2 million dollars would be raised by selling 84,000 shares of common stock

2) Plan B would involve issuing 1.4 million long-term bonds with an effective interest rate of 11.6 percent plus another 0.8 millioin would be raised by selling 42,000 shares of common stock. ?The debt raised under Plan B has no fixed maturity date, in that this amount of financial leverage is considered a permamnent part of the firm's capital structure.

Both plans use a 38% tax rate in their analysis.

1. find the EBIT indifference level associated with the two financing plans

2. prepare a pro forma income statement for the ebit level solved for in part a that shows the eps will be the same regardless whether plan A or B is chosen.

SOLUTION:

1)

I1

I2

PD

T

S1

S2

\$

\$ 162,400

\$

38%

84,000

42,000

(((X - \$0) (1 - 38%) - \$0) / 84,000) = (((X - \$162,400) (1 - 38%) - \$0) / 42,000)

(0.62X / 84,000) = (0.62X - \$100,688) / \$42,000...

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This question was answered on: Oct 07, 2020

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