EBIT-EPS & Capital Structure: Data-Check is considering 2 capital structures. The key information is shown below. Assume a 40% tax rate.
Source of Capital: Structure A ; Structure B
Long-term debt $100,000 at 16% coupon rate $200,000 at 17% coupon rate
Common stock 4,000 shares 2,000 shares
A: Calculate 2 EBIT-EPS coordinates for each of the structures by selecting any 2 EBIT values and finding their associated EPS values.
B: Plot the 2 capital structures on a set of EBIT-EPS axes.
C: Indicate over what EBIT range, if any, each structure is preferred.
D: Discuss the leverage and risk aspects of each structure.
E: If the firm is fairly certain that its EBIT will exceed $75,000, which structure would you recommend? Why?
- Using $50,000 and $60,000 EBIT: