Unformatted text preview: 0 300 16.5 49.50 shown in the table is the number of shares of common stock outstanding under
Associated with each of the debt levels in column 3 of Table 12.10 would be
an interest rate that would be expected to increase with increases in financial
leverage. The level of debt, the associated interest rate (assumed to apply to all
debt), and the dollar amount of annual interest associated with each of the alternative capital structures are summarized in Table 12.11. Because both the level of
debt and the interest rate increase with increasing financial leverage (debt ratios),
the annual interest increases as well.
Table 12.12 uses the levels of EBIT and associated probabilities developed in
Table 12.9, the number of shares of common stock found in column 5 of Table
12.10, and the annual interest values calculated in column 3 of Table 12.11 to calculate the earnings per share (EPS) for debt ratios of 0, 30, and 60%. A 40% tax
rate is assumed. Also shown are the resulting expected EPS, t...
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