Compare your findings in parts b and c and comment on

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Unformatted text preview: e firm’s financial risk. LG4 12–18 EPS and optimal debt ratio Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table. Debt ratio 0% Earnings per share (EPS) Standard deviation of EPS $2.30 $1.15 20 3.00 1.80 40 3.50 2.80 60 3.95 3.95 80 3.80 5.53 a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship. b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk. LG5 12–19 EBIT–EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Source of capital Structure A Structure B Long-term debt $100,000 at 16% coupon rate $200,000 at 17% coupon rate Common stock 4,000 shares 2,000 shares CHAPTER 12 Leverage and Capital Structure 551 a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated...
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