Question

EBIT—EPS and capital structure   ​Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate.

Source of capital	Structure A	Structure B
​Long-term debt	$99,000 at 15.9% coupon rate	$198,000 at 16.9% coupon rate
Common stock	4,800 shares	2,400 shares

a. Calculate two ​EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.

b. Plot the two 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 $70,000​, which structure would you​ recommend? Why?

a. Calculate two ​EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.

Complete the tables below using $50,000 and $60,000

​EBIT:  ​(Round to the nearest dollar. Round the EPS to the nearest​ cent.)

	Structure A
EBIT	$	50,000
Less: Interest	$	15,741
Net profits before taxes	$	34,259
Less: Taxes	$	13,704
Net profit after taxes	$	20,555
EPS (4,800 shares)	$	4.28

​(Round to the nearest dollar. Round the EPS to the nearest​ cent.)

	Structure A
EBIT	$	60,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
EPS (4,800 shares)	$

Answer 1

Answer is given in the below attached images