Question: Consider two capital structure, U and L, both with $50,000 in assets. U is unlevered, and L has $20,000 of debt at 8% interest.

Consider two capital structure, U and L, both with $50,000 in assets. U is unlevered, and L has $20,000 of debt at 8% interest. U has 1,000 shares outstanding, while L has 600 shares outstanding. a) What is the Breakeven EBIT? (Round it up to the nearest number) b) If the EBIT is $5,000, which capital structure will be preferred and why? (3) 53 (5)

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