13-22 EBIT-EPS and capital structure Geniaware is considering two capital structuresThe key information is shown in the following table. Assume a 24% tax rateSource of capitalStructure AStructure BLong-term debt€75,000 at 16% coupon rate€50,000 at 15% coupon rateCommon stock8,000 shares10,000 sharesa. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of€30,000 and €50,000 with their associated EPS values.b. Plot the two capital structures on a set of EBIT-EPS axes.c. Indicate over what EBIT range, if any, each structure is preferred.d. Discuss the leverage and risk aspects of each structure.e. If the firm is fairly certain that its EBIT will exceed €55,000, which structurewould you recommend? Why?Alban

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13-22 EBIT-EPS and capital structure Geniaware is consideri The key information is shown in the following table. Assume a 24% tax rate capital structures. Source of capital Structure A Structure B Long-term debt €75,000 at 16% coupon rate €50,000 at 15% coupon rate Common stock 8,000 shares 10,000 shares a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values o €30,000 and €50,000 with their associated EPS values. b. Plot the two capital structures on a set of EBIT-EPS axes. c. Indicate over what EBIT range, if any, each structure is preferred. d. Discuss the leverage and risk aspects of each structure. e. If the firm is fairly certain that its EBIT will exceed €55,000, which structure would you recommend? Why?

13-22 EBIT-EPS and capital structure Geniaware is consideri The key information is shown in the following table. Assume a 24% tax rate capital structures. Source of capital Structure A Structure B Long-term debt €75,000 at 16% coupon rate €50,000 at 15% coupon rate Common stock 8,000 shares 10,000 shares a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values o €30,000 and €50,000 with their associated EPS values. b. Plot the two capital structures on a set of EBIT-EPS axes. c. Indicate over what EBIT range, if any, each structure is preferred. d. Discuss the leverage and risk aspects of each structure. e. If the firm is fairly certain that its EBIT will exceed €55,000, which structure would you recommend? Why?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

13-22 EBIT-EPS and capital structure Geniaware is considering two capital structures
The key information is shown in the following table. Assume a 24% tax rate
Source of capital
Structure A
Structure B
Long-term debt
€75,000 at 16% coupon rate
€50,000 at 15% coupon rate
Common stock
8,000 shares
10,000 shares
a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of
€30,000 and €50,000 with their associated EPS values.
b. Plot the two capital structures on a set of EBIT-EPS axes.
c. Indicate over what EBIT range, if any, each structure is preferred.
d. Discuss the leverage and risk aspects of each structure.
e. If the firm is fairly certain that its EBIT will exceed €55,000, which structure
would you recommend? Why?
Alban

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Can you help me with B and c?
Percent of capital structure: Preferred stock Common equity (retained earnings) Debt Additional information: Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate Bond yield Flotation cost, preferred Price, common 15% 45 40 35% Debt Preferred stock Common equity (retained earnings) Weighted average cost of capital $ 8.00 $ 3.50 $ 105.00 98 8% $ 10.40 $ 78.00 Calculate the weighted average cost of capital for Digital Processing Incorporated Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. Weighted Cost 5.20 % 8.33 11.50 25.03 %
b) Calculate the cost of preferred shares for Y capital structure.
Given the following information: Percent of capital structure: Debt 35% Preferred stock 20 Common equity (retained earnings) 45 Additional information: Bond coupon rate 11% Bond yield to maturity 9% Dividend, expected common $ 5.00 Dividend, preferred $ 12.00 Price, common $ 60.00 Price, preferred $ 106.00 Flotation cost, preferred $ 4.50 Growth rate 6% Corporate tax rate 25% Calculate the Hamilton Corporation's weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
What is the company's WACC if it has the following capital structure and 40% tax rate? 7.5% Market Value Required rate of return Bond $60,000,000 4% Preferred Stock $60,000,000 6% Common Stock $120,000,000 10% O 6.67% O 9.4% 7.1%
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8-21 capital of $500 million invested in five stocks: Stock Investment Stock's Beta Coefficient A $160 million 0.5 В 120 million 1.2 80 million 1.8 D 80 million 1.0 60 million 1.6 Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-e rate is 6%, and you believe the following probability distribution for future market retums is realistic: TT Probability Market Return 0.1 - 28% 0.2 0.4 12 0.2 30 0.1 50 What is the equation for the security market line (SML)? (Hint: First, determine the expected market return.) Calculate Kish's required rate of return. c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has ar expected return of 15%, and its estimated beta is 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasang the stock? а. b.
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