12 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 debt 60 ratio debt

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Unformatted text preview: Financial Breakeven Points 60% 50 100 95.50 150 200 EBIT ($000) Capital structure debt ratio EBIT $100,000 $200,000 Earnings per share (EPS) 0% $2.40 $4.80 2.91 3.03 30 60 6.34 9.03 tal structures for levels of EBIT between $0 and $50,000. Between $50,000 and $95,500 of EBIT, the capital structure associated with a debt ratio of 30% is preferred. And at a level of EBIT above $95,500, the 60% debt ratio capital structure provides the highest earnings per share.22 22. An algebraic technique can be used to find the indifference points between the capital structure alternatives. This technique involves expressing each capital structure as an equation stated in terms of earnings per share, setting the equations for two capital structures equal to each other, and solving for the level of EBIT that causes the equations to be equal. When we use the notation from footnote 21 and let n equal the number of shares of common stock outstanding, the general equation for the earnings per share from a financing plan is EPS (1 T) (EBIT n I) PD Comparing Cooke Company’s 0% and 30% capital structures, we get (1 0.40) (EBIT 25.00 $0) $0 0.60 EBIT 25.00 10.50 EBIT $225.00 EBIT (1 0.40) 0.60 (EBIT $15.00) 17.50 $0 EBIT $9.00 17.50 15.0...
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This document was uploaded on 01/19/2014.

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