Question: 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

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 $100,00 at 16% coupon rate $200,000 at 17% coupon rate

Common stock 4,000 shares 2,000 shares

  • Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.
  • Plot the two capital structures on a set of EBIT-EPS axes.
  • Indicate over what EBIT range, if any, each structure is preferred.
  • Discuss the leverage and risk aspects of each structure.
  • If the firm is fairly certain that its EBIT will exceed $75,000, which structure would you recommend? Why?

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