a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Graph the two capital structures on the same set of EBIT-EPS axes. c. Discuss the leverage and risk associated with each of the structures. d. Over what range of EBIT is each structure preferred? e. Which structure do you recommend if the firm expects its EBIT to be greater than $42,000? Explain.
a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Graph the two capital structures on the same set of EBIT-EPS axes. c. Discuss the leverage and risk associated with each of the structures. d. Over what range of EBIT is each structure preferred? e. Which structure do you recommend if the firm expects its EBIT to be greater than $42,000? Explain.
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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Transcribed Image Text:EBIT-EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 21% tax rate.
Structure A
Structure B
$71,000 at 15.2% coupon rate
$46,000 at 14.2% coupon rate
Source of capital
Long-term debt
Preferred stock
Common stock
$12,000 with an annual dividend of 18.1% $17,000 with an annual dividend of 18.1%
8,000 shares
10,000 shares
a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.
b. Graph the two capital structures on the same set of EBIT-EPS axes.
c. Discuss the leverage and risk associated with each of the structures.
d. Over what range of EBIT is each structure preferred?
e. Which structure do you recommend if the firm expects its EBIT to be greater than $42,000? Explain.
a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.
Complete the tables below using $30,000 and $50,000 EBIT: (Round to the nearest dollar. Round the EPS to three decimal places.)
Structure A
$
69
EBIT
Less: Interest
Net profits before taxes
Less: Taxes
Net profit after taxes
Less: Preferred dividends
Earnings available for common shareholders
EPS (8,000 shares)
(Round to the nearest dollar. Round the EPS to three decimal places.)
69
$
69
$
69
$
69
$
69
69
$
10
Structure A
$
$
$
EBIT
Less: Interest
Net profits before taxes
Less: Taxes
Net profit after taxes
Less: Preferred dividends
Earnings available for common shareholders
EPS (8,000 shares)
(Round to the nearest dollar. Round the EPS to three decimal places.)
69
69
30,000
69
69
69
50,000
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