DataCheck is considering 2 capital structures.
The key informationis shown in the following table. Assume 40% tax rate.
Source of capital Structure A Structure B. Long-term debt $100,000 at 16% coupon rate $200,000 at 17% coupon rate. Common Stock 4,000 shares 2,000 shares
a. Calculate 2 EBIT-EPS coordinates foreach of the structures by using $50,000 and $60,000 EBIT and finding their associated EPS values. Calculate the Financial Break Even point for each of the structures.
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 $75,000, which structure would you recommend? Why?
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