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With $100 million in assets, Scalan Industries (SI) generates EBIT equal to $14 million. If SI's capital structure includes 20 percent debt, interest on the
With $100 million in assets, Scalan Industries (SI) generates EBIT equal to $14 million. If SI's capital structure includes 20 percent debt, interest on the debt will be 6 percent and there will be 4 million shares of stock outstanding. But, if its capital structure includes 50 percent debt, SI will have to pay 8 percent interest and it will have 2.5 million shares outstanding. Calculate SI's EPS and ROE (ROE=Net income/Equity) for each capital structure. The marginal tax rate is 30 percent. Which capital structure is better?
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