Table 116 the eps for various ebit levelsa case 2

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Unformatted text preview: 4,000 $ 8,000 $12,000 Less: Interest (I) Net profits before taxes $14,000 0.40) 1,600 3,200 4,800 Net profits after taxes $2,400 $ 4,800 $ 7,200 Less: Taxes (T 2,400 2,400 2,400 $ 0 $ 2,400 $ 4,800 $0 1,000 $0 Less: Preferred stock dividends (PD) Earnings available for common (EAC) Earnings per share (EPS) $2,400 1,000 100% $2.40 $4,800 1,000 $4.80 100% aAs noted in Chapter 1, for accounting and tax purposes, interest is a tax-deductible expense, whereas dividends must be paid from after-tax cash flows. 6. As noted in Chapter 7, although preferred stock dividends can be “passed” (not paid) at the option of the firm’s directors, it is generally believed that payment of such dividends is necessary. This text treats the preferred stock dividend as a contractual obligation, not only to be paid as a fixed amount, but also to be paid as scheduled. Although failure to pay preferred dividends cannot force the firm into bankruptcy, it increases the common stockholders’ risk because they cannot be paid dividends until the claims of preferred stockholders are satisfied. CHAPTER 11 Leverage and Capital Structure 431 Measuring the Degree of Financial Leverage (DFL) degree of financial leverage (DFL) The n...
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