A firm has a current capital structure consisting of $400,000 of 6 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 21 percent on ordinary income. If the EBIT is expected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are ________.

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abdullahfarooqi abdullahfarooqi · Answer 1 · 2020-04-10T05:42:08+02:00

Answer:

($24,000, $0) and ($200,000, $2.78)

Explanation:

EBIT=24000

EPS=(24000-400000*6%)*(1-21%)/50000=0

EBIT=200000

EPS=(200000-400000*6%)*(1-21%)/50000=2.7808

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topeadeniran2 topeadeniran2 · Answer 2 · 2021-08-10T15:27:20+02:00

The two EBIT-EPS coordinates for the firm's existing capital structure are ($24,000, $0) and ($200,000, $2.78)

EBIT = $24000

EPS will then be:

= [24000- (400000 × 6%) × (1 - 21%)/50000

= [24000 - 24000) × (79%)/50000

= 0

EBIT= $200000

EPS will now be:

= [(200000- (400000 × 6%)] × (1-21%)/50000

= 2.78

In conclusion, the answer is ($24,000, $0) and ($200,000, $2.78)

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