Question 6 [ Capital Structure Policies]

1. What are the determinants of capital structure of a company?
2. Management of Total S.E. Inc. is considering two alternative financing plans. The detailed information is given in the table below.

Amount in $000	Plan A	Plan B
Common stock	10000	6000
Preferred stock	4000	2000
Borrowings	6000	12000

The par value of common stock is $10, preferred stock has $100 par value and 6% dividend, and long-term debt is presented by 10-year bonds of $1,000 par value and a fixed annual coupon rate of 8%. The corporate income tax rate is 30%.

If the company expects to earn EBIT of 3000 ( amount in $000), which of two plans will produce better EPS and thus higher shareholders' value?