a. Use the current level of EBIT to calculate the times interest earned ratio for each capital structure. Evaluate the current and two alternative capital structures using the times interest earned and debt ratios.

b. Prepare a single EBIT-EPS graph showing the current and two alternative capital structures.

c. On the basis of the graph in part b, which capital structure will maximize Tampa’s earnings per share (EPS) at its expected level of EBIT of $1,200,000? Why might this not be the best capital structure?

d. Using the zero-growth valuation model find the market value of Tampa’s equity under each of the three capital structures at the $1,200,000 level of expected EB1T.

e. On the basis of your findings in parts c and d, which capital structure would you recommend? Why?

Tampa Manufacturing, an established producer of printing equipment, expects its sales to remain flat for the next 3 to 5 years because of both a weak economic outlook and an expectation of little new printing technology development over that period. On the basis of this scenario, the firm’s board has instructed its management to institute programs that will allow it to operate more efficiently, earn higher profits, and, most important, maximize share value. In this regard, the firm’s chief financial officer (CEO), Jon Lawson, has been charged with evaluating the firm’s capital structure. Lawson believes that the current capital structure, which contains 10% debt and 90% equity, may lack adequate financial leverage. To evaluate the firm’s capital structure, Lawson has gathered the data summarized in the following table on the current capital structure (10% debt ratio) and two alternative capital structures—A (30% debt ratio) and B (50% debt ratio)—that he would like to consider.

Lawson expects the firm’s earnings before interest and taxes (EBIT) to remain at its current level of $1,200,000. The firm has a 40% taxrate.

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Capital stricfurc IB ho(50%;debthe Source of capital (10%'debe 51,000,000 9% it30 % de trade " en ele t Long-term debt $3,000,000 10% Coupon interest tate 12% 40,000 shares 13% Commoa stock 100,000 shares70,000 shares Requied cerurm on equity 12% 13%