EBIT—EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the follo
Posted: Tue Jan 18, 2022 12:57 pm
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
$72,000 at 15.9% coupon rate
$47,000 at 14.9% coupon rate
Preferred stock
$12,000 with an annual dividend of
17.5%
$17,000 with an annual dividend of
17.5%
Common stock
8,000
10,000
a. Calculate two EBIT-EPS coordinates for each of the
structures by selecting any two EBIT values and finding their
associated EPS values.
b. Graph the two capital structures on the same set
of EBIT-EPS axes.
c. Discuss the leverage and risk associated with each of the
structures.
d. Over what range of EBIT is each
structure preferred?
e. Which structure do you recommend if the firm expects its EBIT
to be greater than $44,000? Explain.
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
$72,000 at 15.9% coupon rate
$47,000 at 14.9% coupon rate
Preferred stock
$12,000 with an annual dividend of
17.5%
$17,000 with an annual dividend of
17.5%
Common stock
8,000
10,000
a. Calculate two EBIT-EPS coordinates for each of the
structures by selecting any two EBIT values and finding their
associated EPS values.
b. Graph the two capital structures on the same set
of EBIT-EPS axes.
c. Discuss the leverage and risk associated with each of the
structures.
d. Over what range of EBIT is each
structure preferred?
e. Which structure do you recommend if the firm expects its EBIT
to be greater than $44,000? Explain.