Unformatted text preview: 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
McGraw’s EPS at its expected level of EBIT of $1,200,000? Why might this
not be the best capital structure? CHAPTER 11 Leverage and Capital Structure 461 d. Using the zero-growth valuation model given in Equation 11.12, find the
market value of McGraw’s equity under each of the three capital structures at
the $1,200,000 level of expected EBIT.
e. On the basis of your findings in parts c and d, which capital structure would
you recommend? Why? WEB EXERCISE
W Go to the Web site www.smartmoney.com. In the column on the right under
Quotes & Research enter the symbol DIS; click on Stock Snapshot; and then click...
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