Clark Co. is considering two capital structures. Assume a 40%tax rate. Source of
ID: 2661690 • Letter: C
Question
Clark Co. is considering two capital structures. Assume a 40%tax rate. Source ofcapital StructureA Structure B Long -termdebt $100,000at 16% coupon rate $200,000 at17% coupon rate Commonstock 4,000shares 2,000 shares Calculate two EBIT-EPS coordinates for each of the structuresby selecting any two EBIT values and finding their associated EPSvlues. Clark Co. is considering two capital structures. Assume a 40%tax rate. Source ofcapital StructureA Structure B Long -termdebt $100,000at 16% coupon rate $200,000 at17% coupon rate Commonstock 4,000shares 2,000 shares Calculate two EBIT-EPS coordinates for each of the structuresby selecting any two EBIT values and finding their associated EPSvlues.Explanation / Answer
For A
EBIT 400,000
- interestexpense (160000)
($100,000 at 16% coupon rate )
EBT 240000
- taxes(40%) (96000)
EAT 144000
# sharesoutst. 4,000
EPS 36
For B
EBIT 400,000
- interestexpense (34000)
$200,000 at 17% coupon rate
EBT 366000
- taxes(40%) (146400)
EAT 144000
# sharesoutst. 2,000
EPS 73.2
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