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EBIT-EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate. Source of capital Structure A Structure B Long-term debt $75,000 at 16.0% coupon rato $50,000 at 15.0% coupon rate Preferred stock $10,000 with an annual dividend of 18.0% $15,000 with an annual dividend of 18.0% Common stock 8,000 shares 10,000 shares a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding thoir associated EPS values b. Graph the two capital structures on the same set of EBIT-EPS axes. c. Discuss the leverage and risk associated with each of the structures. d. Over what range of EBIT is each structure preferred? e. Which structure do you recommend if the firm expects its EBIT to be greater than $35,000? Explain, $ $ a. Calculate two EBIT-EPS coordinates for each of the structuros by selecting any two EBIT values and finding their associated EPS values Complete the tables below using $30,000 and $50,000 EBIT: (Round to the nearest dollar. Round the EPS to three decimal places.) Structure A EBIT $ 30,000 Loss: Interest Net profits before taxes Less: Taxes Net profit after taxes Loss: Preferred dividends Earnings available for common shareholders EPS (8,000 shares) $ (Round to the nearest dollar. Round the EPS to three decimal places.) $ $ $ $ Structure A EBIT $ 50,000 Less: Interest $ $ 67 Net profits before taxes Less: Taxes $ Net profit after taxes Less: Preferred dividends $ Earnings available for common shareholders EPS (8,000 shares) (Round to the nearest dollar. Round the EPS to three decimal places.) $ $ Structure B $ 30,000 $ $ $ EBIT Less: Interest Net profits before taxes Less: Taxes Net profit after taxes Less: Preferred dividends Earnings available for common shareholders EPS (10,000 shares) $ $ $ (Round to the nearest dollar. Round the EPS to three decimal places.) Structure B EBIT $ 50,000 $ Less: Interest Net profits before taxes Less: Taxes $ $ $ $ $ Net profit after taxes Less: Preferred dividends $ Earnings available for common shareholders EPS (10,000 shares) The financial breakeven point for structure A is $ (Round to the nearest dollar.) The financial breakeven point for structure B is $. (Round to the nearest dollar.) b. Graph the two capital structures on the same set of EBIT-EPS axes. Which graph below correctly depicts the EBIT vs. EPS relation? The correct graph is V. (Select from the drop-down menu.) Graph 1 Comparison of Financial Structures oo EBIT-EPS and preferred stock Litho-Print is considering two possible capital structures. A and B shown in the following table. Assume a 40% tax rate The financial breakeven point for structure is $ (Round to the nearest dollar) The financial breakeven point for structure Biss (Round to the nearest dollar) b. Graph the two capital structures on the same set of EBIT-EPs axos. Which graph below correctly depicts the EBIT V. EPS relation? (Select from the drop-down menu) Graph 1 Q Comparison of Financial Structures Q The correct graph is 11 Graph 2 Comparison of Financial Structures 25 Structure A Structure B 25 Structure A Structure B 2 2 EPS (5) EPS (5) 05 05 0 O 10,000 40,000 50,000 10 000 10000 20.000 30.000 EBIT (5) 20.000 30,000 EBIT (5) 50,000 Comparison of Financial Structures Comparison of Financial Structurer 254 Structure A Structure B 25 Structure A Structure B 2 2 EPS (5) EPS (5) 15 15 11 1 05 05 0 10,000 40,000 50,000 0 10 000 50.000 40.000 20.000 30.000 EBIT (S) 20.000 30 000 EBIT (5) c. Discuss the leverage and risk associated with each of the structures. (Select from the drop-down menus.) Structure has greator financial leverago, hence financial risk d. Over what range of EBIT is each structure preferred? (Select from the drop-down monus.) 11 EBIT is expected to be below, Structure is preferred. I EBIT is expected to be above , Structure is preferred e. Which structure do you recommend if the firm expects its EBIT to be greater than $35,000? Explain. (Select from the drop-down menu.) If EBIT is greater than $35,000, Structure is recommended since changes in EPS are much greater for given values of EBIT
