6 presents the eps corresponding to levels of ebit of

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Unformatted text preview: levels of EBIT of $6,000, $10,000, and $14,000, assuming that the firm is in the 40% tax bracket. Two situations are shown: 8. As noted in Chapter 7, although preferred stock dividends can be “passed” (not paid) at the option of the firm’s directors, it is generally believed that payment of such dividends is necessary. This text treats the preferred stock dividend as a contractual obligation, not only to be paid as a fixed amount, but also to be paid as scheduled. Although failure to pay preferred dividends cannot force the firm into bankruptcy, it increases the common stockholders’ risk because they cannot be paid dividends until the claims of preferred stockholders are satisfied. CHAPTER 12 TABLE 12.6 517 Leverage and Capital Structure The EPS for Various EBIT Levelsa Case 2 Case 1 40% EBIT 40% $6,000 $10,000 2,000 2,000 2,000 $4,000 $ 8,000 $12,000 Less: Interest (I) Net profits before taxes Less: Taxes (T $14,000 0.40) 1,600 3,200 4,800 Net profits after taxes $2,400 $ 4,800 $ 7,200 Less: Preferred stock dividends (PD) Earnings per share (EPS) 2,400 2,400 2,400 $ 0 $ 2,400 $ 4,800 $0 1,000 Earnings available for common (EAC) $0 $2,400 1,000 $2.40 100% $4,800 1,000 $4.80 100% aAs noted in Chapter 1, for acco...
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