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Unformatted text preview: following table. Assume a 40%
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 a. Calculate two EBIT–EPS coordinates for each of the structures by selecting
any two EBIT values and finding their associated EPS values.
b. Plot the two capital structures on a set of EBIT–EPS axes.
c. Indicate over what EBIT range, if any, each structure is preferred.
d. Discuss the leverage and risk aspects of each structure.
e. If the firm is fairly certain that its EBIT will exceed $75,000, which structure
would you recommend? Why?
LG6 11–16 EBIT–EPS and preferred stock Litho-Print is considering two possible capital
structures, A and B, shown in the following table. Assume a 40% tax rate.
Source of capital Structure A Structure B Long-term debt $75,000 at 16% coupon rate $50,000 at 15% coupon rate Preferred stock $10,000 with an 18% annual
dividend $15,000 with an 18% annual
dividend Common stock...
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- Spring '14