P13-22 EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 21% tax rate. 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? What if the tax rate is higher, say 40%?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
- Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.
- Plot the two capital structures on a set of EBIT–EPS axes.
- Indicate over what EBIT range, if any, each structure is preferred.
- Discuss the leverage and risk aspects of each structure.
- If the firm is fairly certain that its EBIT will exceed $75,000, which structure would you recommend? Why? What if the tax rate is higher, say 40%?
On number 1, can you just pick any random values for EBIT? I'm not sure how to answer these questions.
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