EBITEPS

and capital structureData-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	$92,000 at 15.8% coupon rate	$184,000 at 16.8% coupon rate
Common stock	4,200 shares	2,100 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 $79,000, which structure would you recommend? Why? What if the tax rate was higher, say 40%?

Question content area bottom

Part 1

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

$50,000 and $60,000 EBIT:(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 (4,200 shares)	$

(Round to the nearest dollar. Round the EPS to the nearest cent.)

	Structure A
EBIT	$	60,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
EPS (4,200 shares)	$

(Round to the nearest dollar. Round the EPS to the nearest cent.)

	Structure B
EBIT	$	50,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
EPS (2,100 shares)	$

Round to the nearest dollar. Round the EPS to the nearest cent.)

	Structure B
EBIT	$	60,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
EPS (2,100 shares)	$

The financial breakeven point for structure A is $ enter your response here. (Round to the nearest dollar.)

The financial breakeven point for structure B is $ enter your response here. (Round to the nearest dollar.)

b. Which graph below correctly depicts the EBIT vs. EPS relation?

The correct graph is

c. Indicate over what EBIT range, if any, each structure is preferred. (Select from the drop-down menus.)

If EBIT is expected to be below $47,287, _Structure is preferred. If EBIT is expected to be above $47,287, _Structure is preferred.

d. Discuss the leverage and risk aspects of each structure. (Select from the drop-down menus.)

Structure A has less more risk and promises higher lower returns as EBIT increases. B is more less risky since it has a higher lower financial breakeven point. The steeper slope of the line for Structurealso indicates greater financial leverage.