Unformatted text preview: 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 its EBIT will exceed $75,000, which structure
would you recommend? Why?
LG5 12–20 EBIT–EPS and preferred stock Litho-Print is considering two possible
capital structures, A and B, shown in the following table. Assume a 40%
Source of capital Structure A Structure B Long-term debt $75,000 at 16% coupon rate $50,000 at 15% coupon rate Preferred stock $10,000 with an 18% annual
dividend $15,000 with an 18% annual
dividend Common stock 8,000 shares 10,000 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. Graph the two capital structures on the same set of EBIT–EPS axes.
c. Discuss the leverage and risk associated with each of the structures.
d. Over what range of EBIT is each structure pre...
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