Unformatted text preview: ructure. The best capital structure can be selected by using a valuation model to link return
and risk factors. The preferred capital structure is
the one that results in the highest estimated share
value, not the highest EPS. Other important nonquantitative factors, such as revenue stability, cash
flow, contractual obligations, management preferences, control, external risk assessment, and timing,
must also be considered when making capital structure decisions.
LG6 (Solutions in Appendix B)
Breakeven point and all forms of leverage TOR most recently sold 100,000
units at $7.50 each; its variable operating costs are $3.00 per unit, and its fixed
operating costs are $250,000. Annual interest charges total $80,000, and the
firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It
currently has 20,000 shares of common stock outstanding. Assume that the firm
has a 40% tax rate.
a. At what level of sales (in units) would the firm break even on operations (that
is, EBIT $0)? 454 PART 4 Long-Term Financial Decisions...
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