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Lecture 9: Capital Structurel 1. EBIT and Leverage Music City, Inc,, has no debt outstanding and a total market value of $295,000. Earnings before interest
Lecture 9: Capital Structurel 1. EBIT and Leverage Music City, Inc,, has no debt outstanding and a total market value of $295,000. Earnings before interest and taxes, EBIT, are projected to be $23,000. The company is considering an used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assum e that the company has a tax rate of 35 percent. a. Show the company's balance sheet of current (i.e., all equity financed) and proposed capital structure. b. Calculate EPS under the current all-equity capital structure and under the proposed financing plan. c. At what EBIT will EPS be the same between the two capital structures? In other words, what is the break even EBIT? Draw a graph that shows EPS and EBIT relations as we did in class. d
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