EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Source of capital Long-term debt Common stock Structure A $92,000 at 15.2% coupon rate 4,400 shares Structure B $184,000 at 16.2% coupon rate 2,200 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. 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 $73,000, which structure would you recommend? Why?
EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Source of capital Long-term debt Common stock Structure A $92,000 at 15.2% coupon rate 4,400 shares Structure B $184,000 at 16.2% coupon rate 2,200 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. 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 $73,000, which structure would you recommend? Why?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter11: Determining The Cost Of Capital
Section: Chapter Questions
Problem 1Q: Define each of the following terms:
Weighted average cost of capital, WACC; after-tax cost of debt,...
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![EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following
table. Assume a 40% tax rate.
Source of capital
Long-term debt
Common stock
Structure A
$92,000 at 15.2% coupon rate
4,400 shares
Structure B
$184,000 at 16.2% coupon rate
2,200 shares
5
a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding 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 $73,000, which structure would you recommend? Why?
00
S](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5c708bf4-2749-4dab-8902-2a6d04988193%2F428153f2-a4c9-4b08-b13f-d7a25c7a082c%2Fq3e603e_processed.png&w=3840&q=75)
Transcribed Image Text:EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following
table. Assume a 40% tax rate.
Source of capital
Long-term debt
Common stock
Structure A
$92,000 at 15.2% coupon rate
4,400 shares
Structure B
$184,000 at 16.2% coupon rate
2,200 shares
5
a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding 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 $73,000, which structure would you recommend? Why?
00
S
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