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feel free to ask>> Abe Forrester and three of his friends from college have interested a group of venture capitalists 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: !lan A is an all"common"e#uit$ structure in which %&.& million dollars would be raised be selling '',((( shares of common stock. !lan ) would involve issuing %*.& million dollars in long"term bonds with an effective interest rate of **.+, plus %* million would be raised b$ selling --,((( shares of common stock. The debt funds raised under !lan ) have no fi.ed maturit$ date, in that this amount of financial leverage is considered a permanent part of the firm/s capital structure. Abe and his partners plan to use a 0', ta. rate in their anal$sis, and the$ have hired $ou on a consulting basis to do the following: a. Find the 1)2T indifference level associated with the two financing plans. b. !repare a pro forma income statement for the 1)2T level solved for in !art a. that shows that 1!S will be the same regardless whether !lan A or ) is chosen.Solution : 1)2T indifference point is the point where 1!S is same under both the option. 3et that point be 4
Plan A Number of Share Debt Debt Rate Intere t !a" Rate #8.00% 88000 0 Plan B 44000 $1,200,000 11.90% $142,800.00 #8.00%

2nterest 1.pense 5 *&((((( . **.+(, 5 *-&'(( 1!S under 1#uit$ !lan 6476*"Ta. 8ate99:;umber of Share <utstanding =nder 1#uit$ !lan 6476*".0'99:'',((( """"6*9 1!S under Debt !lan 664"2nterest 1.pense976*"Ta. 8ate99:;umber of Share <utstanding =nder Debt !lan 664"*-&'((976*".0'99:--((( """6&9 So now 6*9 must e#ual 6&9

6476*".0'99:'',((( 5 664"*-&'((976*".0'99:--((( 6476.>&99:6'',(((:--(((9 5 664"*-&'((976.>&99 .>&4:& 5 6.>&4"''?0>9 .>&4 5 &76.>&4"''?0>9 .>&4 5 *.&-4 @ *AA(A& *.&-4".>&4 5 *AA(A& .>&4 5 *AA(A& 4 5 &'?>(( !A8T ).
Plan A $BI! 'e ( Intere t $")en e $arn*n+ Before !a"e 'e ( !a"e Net In,ome -$B!. !a"e / Number 1f 2ommon Share $PS 28%&00 0 28%&00 108%28 100002 88000 2.01 Plan B 28%&00 142800 142800 %42&4 88%#& 44000 2.01