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Data-Check is considering two capital structures. The key information is shown in the following table Assume a 21% tax rate Source of capital Structure A
Data-Check is considering two capital structures. The key information is shown in the following table Assume a 21% tax rate Source of capital Structure A Long-term debt $ 90,000 at 15.4% coupon rate Common stock Structure B $180,000 at 16.4% coupon rate 2,450 shares 4,900 shares 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 table below using $50,000 and $60,000 EBIT: Structure A Structure B EBIT 50,000 $60,000$50,000 $ 60,000 Less: Interest Net profits before taxes $ Less: Taxes Net profit after taxes EPS (4,250 shares) EPS (2,125 shares) 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. If EBIT is expected to be below S If EBIT is expected to be above $ Structure is preferred. Structure_ is preferred. d. Discuss the leverage and risk aspects of each structure Structure it has a higher financial breakeven point. The steeper slope of the line for Structure indicates greater financial leverage. e. If the firm is fairly certain that its EBIT will exceed $72,000, which structure would you recommend? why? what if the ta_x rate was higher, say 40%? has less risk and promises lower returns as EBIT increases is more risky since also
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