EBIT- EPS and capital structure 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

$94,000 at 15.6% coupon rate

$188,000 at 16.6% coupon rate

Common stock

5,000 shares

2,500 shares

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

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

c. Indicate over what BIT range, if any, each structure is preferred.

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

0. If the firm is fairly certain that its BIT will exceed $73,000, which structure would you recommend? Why? What if the tax rate was higher, say 40%?

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

Complete the tables below using $50,000 and $60,000 BIT: (Round to the nearest dollar. Round the EPS to the nearest cent.)

Structure A

EBIT

50.000

Less: Interest

Net profits before taxes

Less: Taxes

Net profit after taxes

EPS (5,000 shares)