Midway Mask Co. is considering two capital structures. The key information follows. Assume a 40 percent tax rate, interest rates on the debt as labeled, and expected Earnings Before Interest and Taxes (EBIT) of $50,000.

1. Indicate over what EBIT range each Structure is preferred if the goal is to maximize EPS. Approach this by calculating the expected EBIT level at which the EPS that would be generated under each Structure is the same (the indifference point). Then state which Structure is preferred at EBIT levels above and below that point.

Source of Capital Long-term debt Common stock - Structure 1 $500,000 @ 8% 10,000 shares Structure 2 $350,000 @ 7% 20,000 shares