Reference no: EM132490069
EBIT - EPS capital structure - Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 21% tax rate.
Source of Capital Structure A Structure B
Long-term debt $95,000 at 15.9% coupon rate $190,000 at 16.9% coupon rate
Common stock 4,000 shares 2,000 shares
Question a. calculate two EBIT - EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS value.
Question b. plot the two capital structures on a set of EBIT - EPS axes.
Question c. indicate over what EBIT range, if any, each structured is preferred.
Question d. discuss the leverage and risk aspects of each structure.
Question e. If the firm is fairly certain that its EBIT will exceed $78,000, which structure would you recommend? Why? What is the tax rate was higher say 40%?
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