Question: 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

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

$96,000

at

15.4%

coupon rate

$192,000

at

16.4%

coupon rate

Common stock

4,700

shares

2,350

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 $71,000, which structure would you recommend? Why?

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