Question

EBIT-EPS and capital structure Data-Check is considering two capital structures. The kay information is shown in the following table. Assume a 40% tax rate, Source of capital Structure A Structure B Long-term debt 592.000 at 15 9% coupon rate $184.000 at 16.9% coupon rate Common stock 4,300 shares 2.150 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 ins ÉBIT wil exceed $75,000, which structure would you recommend? Why? 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 S 50.000 Less Interest Net profits before taxes 5 Less. Taxes Net profit after taxes EPS (4,300 shares) S S Enter any number in the edit fields and then click Check Answer 9 parts remaining Clear All Check Answer

Answer 1

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02:24 W ENG 99+ 31-07-2020 28 Х AC132 . U V W X Y Z AA AB AC AD 114 A B structure LONG TERM DEBT COUPON RATE INTEREST ON DEBT COMMON STOCK (SHARES) 92000 15.90% 14628 184000 16.90% 31096 4300 2150 115 116 117 118 119 120 121 122 123 124 125 a CALCULATION OF EPS FOR AT EBIT = 50000 EBIT 50000 50000 INTEREST 14628 31096 EBT 35372 14148.8 21223.2 18904 7561.6 TAX AT 40% 126 NET INCOME 11342.4 EPS 4.94 5.28 127 128 129 130 131 132 133 CALCULATION OF EPS FOR AT EBIT = 60000 EBIT 60000 60000 INTEREST 14628 31096 EBT 45372 28904 11561.6 TAX AT 40% 18148.8 27223.2 NET INCOME 17342.4 134 135 136 137 EPS 6.33 8.07 retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV std costing EPS%, ECONOMY, BEFORE AFTER BUYBACK ...

C W ENG 02:25 31-07-2020 99+ 28 Х AC161 . U V w X Y Z AA AB AC AD 138 b GRAPH EBIT 50000 EPS(A) 4.94 6.33 EPS(B) 5.28 8.07 60000 EBIT-EPS ANALYSIS 9.00 8.00 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 7.00 6.00 con 5.00 4.00 3.00 2.00 1.00 0.00 Plot Area Plot Area 1000 48000 50000 52000 56000 58000 60000 62000 EPS EPS(A) EPS(B) 158 159 160 161 retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV std costing EPS%, ECONOMY, BEFORE AFTER BUYBACK

C w ENG 02:25 31-07-2020 99+ 28 Х AB181 fx . U V W X Y Z AA AB AC AD 161 с TO INDICATE RANGE OVER WHICH STRUCTURE IS TO BE PREFERRED, INDIFFERENCE POINT IS TO BE FOUND 162 163 164 165 166 INDIFFERENCE POINT (EBIT-INTEREST)*(1-t)/ NO OF SHARES (EBIT-31096)*(1-0.4)/ 2150 = 167 168 169 170 (EBIT-INTEREST)*(1-t)/ NO OF SHARES (EBIT-14628)*(1-0.4)/ 4300 DIVIDE BOTH THE SIDES BY (1-0.4) (EBIT-14628)/ 4300 (EBIT-14628) (EBIT-14628) (EBIT-14628) EBIT 171 (EBIT-31096)/ 2150 (4300/2150) (EBIT-31096) (2)(EBIT-31096) 2(EBIT) - 62192 47564 172 RANGE 173 174 175 176 177 178 IF EBIT IS LOWER THAN 47564, LOWER DEBT PLAN SHOULD BE PREFERRED THAT IS STRUCTURE A IS TO BE SELECTED 179 180 IF EBIT IS HIGHER THAN 47654, HIGHER DEBT PLAN SHOULD BE PREFERRED THAT IS STRUCTURE B IS TO BE SELECTED 181 182 d STRUCTURE A HAS LOWER DEBT SO HAS LOWER LEVERAGE AND LOWER RISK COMPARED TO STRUCTURE B 183 184 retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV std costing EPS%, ECONOMY, BEFORE AFTER BUYBACK ...

W ? ENG 02:25 31-07-2020 99+ 28 Х AB203 fc . U V W X Y Z AA AB AC AD 181 182 d STRUCTURE A HAS LOWER DEBT SO HAS LOWER LEVERAGE AND LOWER RISK COMPARED TO STRUCTURE B 183 184 185 186 STRUCTURE B HAS HIGHER DEBT COMPARED TO STRUCTURE A SO IT HAS HIGHER LEVERAGE AND HIGHER RISK COMPARED TO STRUCTURE A 187 IF EBIT = 75000 STRUCTURE B IS TO BE SELECTED AS EBIT IS HIGHER THAN FINANCIAL BREAKEVEN POINT 188 189 190 191 192 193 194 195 196 197 Plot Area 198 199 200 201 202 203 204 retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV std costing EPS%, ECONOMY, BEFORE AFTER BUYBACK ... ..