Suppose SpazioDatti is considering adding preferred stock to its capital structures. The key information is shown in the following table. Assume a 24% tax rate.

a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of €30,000 and €40,000 with their associated EPS values.

b. Plot the two capital structures on a set of EBIT-EPS axes.

c. Discuss the leverage and risk aspects of each structure.

d. Indicate over what EBIT range, if any, each structure is preferred.

e. If the firm is fairly certain that its EBIT will exceed €42,000, which structure would you recommend? Why?

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Source of capital Long-term debt Common stock Preferred stock Structure A 100,000 at 10% coupon rate 5,000 shares 10,000 with a 12% annual dividend Structure B 50,000 at 5% coupon rate 10,000 shares 20,000 with a 12% annual dividend