Franklin Coin, Inc. is considering two capital structures. The key information f

Question

Franklin Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000.

Table

Source of capital                Structure 1            Structure 2

- Long-term debt               $500,000 @ 8%       $ 350,000 @ 7%

- Common stock                 10,000 shares           20,000 shares

a) Calculate two EBIT-EPS coordinates for each of the structures.

b) Indicate over what EBIT range, if any, each structure.

Show your work,

please.

Thank you

Explanation / Answer

For Structure I : Interest = 500,000 *0.08 = $40,000 EBT = EBIT - Interest = $10,000 Net Profit = EBT*(1- tax rate) = 10,000*0.6 = $6,000 ; EPS = Net profit /Shares = 0.6 so (EBIT,EPS) = (50,000 , 0.6) For Structure II : Interest = 350,000 *0.08 = $24,500 EBT = EBIT - Interest = $25,500 Net Profit = EBT*(1- tax rate) = 25,500*0.6 = $15,300 ; EPS = Net profit /Shares = 0.765 (EBIT , EPS) = (50,000,0.765)

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.