Bthe using the data in table 119 we can calculate the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ty. bThe Using the data in Table 11.9, we can calculate the coordinates needed to plot the 30% and 60% debt capital structures. For convenience, using the same $100,000 and $200,000 EBIT values used earlier to plot the current capital structure, we get the information in the following table. Capital structure 30% Debt ratio EBIT (assumed) $100,000 $200,000 $100,000 $200,000 15,000 15,000 49,500 49,500 $ 85,000 $185,000 $ 50,500 $150,500 34,000 74,000 20,200 60,200 $ 51,000 3 $111,000 $ 30,300 $ 90,300 Interest (Table 11.9) Net profits before taxes Taxes (T 0.40) Net profits after taxes EPS 60% Debt ratio $51,000 17,500 sh. $2.91 $111,000 17,500 sh. $6.34 $30,300 10,000 sh. $3.03 $90,300 10,000 sh. $9.03 The two sets of EBIT–EPS coordinates developed in the preceding table, along with those developed for the current zero-leverage capital structure, are summarized and plotted on the EBIT–EPS axes in Figure 11.5. This figure shows that each capital structure is superior to the others in terms of maximizing EPS over certain ranges of EBIT: The zero-leverage capital structure (debt ratio 0%) is superior to either of the other capital structures for levels of EBIT between $0 and $50,000. Between $50,000 and $95,50...
View Full Document

Ask a homework question - tutors are online