three recent graduates of the computer science program at university of tenessee are forming a company that will write and distiribute new application software for the Iphone. Innitially, the corporation will operate in the southern region of Tennessee, Georga, Nort Carolina and South Carolina. A small group of private investors in Atlanta, Georgia area is interested in financing the startup compaty and two financing plans have been put forth far consideration - The first (Pan A) is an all common-equity capital structure. $2.0 million doliars would be raised by seling commen stock at $20 per common shaer - Plan B would involve the use of financial feverage. 51.0 milison dollars would be raised by seling bonds with an effective interest rate of 11.0 percent (per annum), and the remaining $1.0 milion would be raised by selling commen stock at the $20 pelice per share. The use of financial leverage is considered to be a permanent part of the fimis capitalization, so no fixed maturity date is needed for the analysis. A 30 percent lax rate is deemed appropriate for the atalysia
a. Find the EBIT indifference fevel associafed with the two fitiancing plans. b. A detailed financial analysis of the firm's prospects suggests that the fongtem EBIT wil be above $300,000 anneally. Taking this Into consideration, which plan will generate the higher EPS?