You're a financial analyst at Rick and Morty Enterprises, Inc. (RME), a successful entrant in the new and rapidly growing field of interdimensional tourism. As in most new fields, however, rapid growth is anything but ensured, and RME's future performance is uncertain. The firm expects to earn operating profits of $4 million next year, up from $1 million last year. To support this enormous growth, the firm plans to raise $15 million in new capital. It already has capital of $5 million that is 40% debt. RME can raise the new money in any proportion of debt and equity management chooses. The CFO is considering three possibilities: all equity, $8 million debt and $7 million equity, and all debt. Interest on the current debt as well as on new borrowing is expected to be 12.5%, and the company pays state and federal income taxes at a combined rate of 41%. Equity will be raised by selling stock at the current market price of $10 which is equal to its book value. The CFO has asked you to prepare an analysis to aid management in making the debt/equity decision. 1. Prepare an EBIT-EPS analysis of the situation showing a line for the capital structure that results from each of the three options. (Calculate EPS under each new capital structure at EBIT levels of $1 million, $2 million, and $4 million.) Round EPS to two decimal places and do not include the "$". Assume a negative EBT generates a negative tax. INCOME STATEMENTS AT EBIT = $4000 Capital Structure Options ($000). 1 2 3 EBIT $4,000 $4,000 $4,000 Interest EBT Tax Net Income $ $ $ EPS INCOME STATEMENTS AT EBIT = $2000 Capital Structure Options ($000). 2 2,000 2,000 1 3 2,000 EBIT Interest EBT Tax Net Income $ $ $ EPS INCOME STATEMENTS AT EBIT = $1000 Capital Structure Options ($000). 2 1 3 EBIT Interest EBT Tax Net Income $ $ $ EPS 2. Graph EBIT versus EPS for each option. Show last year's EPS on the graph. Enter the letter of the correct graph: A EPS EPS 5 3- 5 4 4 3- 3 3 2 2 1 1 EBIT EBIT 1000 2000 3000 4000 5000 1000 2000 3000 4000 5000 -1 -1 -24 -2+ -3 -3 B D EPS EPS 5 5 4 4 3 3 2 -3- 2 1 1 23- EBIT ta EBIT 1000 2000 3000 4000 5000 1000 2000 3000 4000 5000 -1 -1 -2+ -2