Unformatted text preview: 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 preferred?
e. Which structure do you recommend if the firm expects its EBIT to be
LG6 11–17 Optimal capital structure Nelson Corporation has collected the following data
associated with four possible capital structures.
coefficient of variation
of EPS $1.92 .4743 20 2.25 .5060 40 2.72 .5581 60 3.54 .6432 The firm’s research indicates that the marketplace assigns the following required
returns to risky earnings per share. CHAPTER 11 Leverage and Capital Structure Coefficient of variation
of EPS Estimated required
return, ks .43 15% .47 16 .51 17 .56 18 .60 22 .64 45...
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