EBITEPS

and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate.

Source of capital	Structure A	Structure B
Long-term debt	$76,000 at 15.8% coupon rate	$51,000 at 14.8% coupon rate
Preferred stock	$12,000 with an annual dividend of 18.1%	$17,000 with an annual dividend of 18.1%
Common stock	8,200 shares	10,200 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. Graph the two capital structures on the same set of EBIT-EPS axes.

c. Discuss the leverage and risk associated with each of the structures.

d. Over what range of EBIT is each structure preferred?

e. Which structure do you recommend if the firm expects its EBIT to be greater than

$39,000?

Explain.

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 $30,000 and $50,000

EBIT: (Round to the nearest dollar. Round the EPS to three decimal places.)

	Structure A
EBIT	$	30,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
Less: Preferred dividends	$
Earnings available for common shareholders	$
EPS (8,200 shares)	$

Part 2

(Round to the nearest dollar. Round the EPS to three decimal places.)

	Structure A
EBIT	$	50,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
Less: Preferred dividends	$
Earnings available for common shareholders	$
EPS (8,200 shares)	$

Part 3

(Round to the nearest dollar. Round the EPS to three decimal places.)

	Structure B
EBIT	$	30,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
Less: Preferred dividends	$
Earnings available for common shareholders	$
EPS (10,200 shares)	$

Part 4

(Round to the nearest dollar. Round the EPS to three decimal places.)

	Structure B
EBIT	$	50,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
Less: Preferred dividends	$
Earnings available for common shareholders	$
EPS (10,200 shares)	$

Part 5

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

Part 6 The financial breakeven point for structure B is $enter your response here.

(Round to the nearest dollar.)