Question
EBIT long dash EPS and capital structureData-Check is considering two capital structures. The key information is shown in the following table. Assume a 40 %
EBIT long dash EPS and capital structureData-Check is considering two capital structures. The key information is shown in the following table. Assume a 40 % 40% tax rate. Source of capital Structure A Structure B Long-term debt $ 92 comma 000 $92,000 at 15.1 % 15.1% coupon rate $ 184 comma 000 $184,000 at 16.1 % 16.1% coupon rate Common stock 4 comma 800 4,800 shares 2 comma 400 2,400 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 $ 80 comma 000 $80,000, which structure would you recommend? Why?
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