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:
Plan A is an all-common-equity structure in which $2.2 million dollars would be raised by selling 86,000 shares of common stock.
Plan B would involve issuing $1.2 million in long-term bonds with an effective interest rate of 12.1 percent plus another $1.0 million would be raised by selling 43,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity 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 35 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:
A: Find the EBIT indifference level associated with the two financing plans? (Round to the nearest dollar)