Question: Structure A is a 100% equity structure with 150,000 shares outstanding and a $500,000 market value. Structure B is a 50/50 debt equity split with

Structure A is a 100% equity structure with 150,000 shares outstanding and a $500,000 market value.

Structure B is a 50/50 debt equity split with a total market value of $500,000

The rate on the debt will be 10%. Assume a tax rate of 35% and a projected EBIT of $75,000

Structure A

Structure B

EBIT

75,000

75,000

Interest

0

25,000

Taxes

26,250

17,500

Net Income

48,750

32,500

EPS

.325

.217

ROE

9.75%

13%

What structure provides the better results for the company?

Does including taxes in the analysis make a difference in the results?

What is the primary impact of financial leverage on stockholders?

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