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Unformatted text preview: equity, ksc
aThese structures are based on maintaining the firm’s current level of $10,000,000 of total financing.
rate applicable to all debt.
cMarket-based return for the given level of risk.
bInterest 556 PART 4 Long-Term Financial Decisions Lawson expects the firm’s earnings before interest and taxes (EBIT) to
remain at its current level of $1,200,000. The firm has a 40% tax rate. Required
a. Use the current level of EBIT to calculate the times interest earned ratio for
each capital structure. Evaluate the current and two alternative capital structures using the times interest earned and debt ratios.
b. Prepare a single EBIT–EPS graph showing the current and two alternative
c. On the basis of the graph in part b, which capital structure will maximize
Tampa’s earnings per share (EPS) at its expected level of EBIT of
$1,200,000? Why might this not be the best capital structure?
d. Using the zero-growth valuation model given in Equation 12.12, find the
market value of Tampa’s equity under each of the three capital structures at
the $1,200,000 level of expected EBIT.
e. On the basis of...
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