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Unformatted text preview: under consideration.
0% Before-tax cost
of debt, kd
10.0% 15 8.0 10.5 30 10.0 11.6 45 13.0 14.0 60 17.0 20.0 a. Calculate the level of EBIT associated with each of the three levels of sales.
b. Calculate the amount of debt, the amount of equity, and the number of
shares of common stock outstanding for each of the capital structures being
considered. CHAPTER 12 Leverage and Capital Structure 555 c. Calculate the annual interest on the debt under each of the capital structures
being considered. (Note: The before-tax cost of debt, kd, is the interest rate
applicable to all debt associated with the corresponding debt ratio.)
d. Calculate the EPS associated with each of the three levels of EBIT calculated
in part a for each of the five capital structures being considered.
e. Calculate (1) the expected EPS, (2) the standard deviation of EPS, and (3) the
coefficient of variation of EPS for each of the capital structures, using your
findings in part d.
f. Plot the expected EPS and coefficient of variation of EPS against the capital
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