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 ________.

Question

Quizplus · Accepted Answer

To find the EBIT-EPS coordinates, we need to use the following formula:

EPS = [EBIT - Interest(1 - Tax Rate)] / Number of Shares

First, we need to calculate the interest expense:

Interest Expense = $400,000 x 6% = $24,000

Now, let's calculate the EBIT-EPS coordinates:

Coordinate 1: If the EBIT is $24,000, then EPS = [$24,000 - $24,000(1 - 0.21)] / 50,000 = $0

Coordinate 2: If the EBIT is $200,000, then EPS = [$200,000 - $24,000(1 - 0.21)] / 50,000 = $2.78

Therefore, the two EBIT-EPS coordinates for the firm's existing capital structure are ($24,000,$0) and ($200,000,$2.78), and the correct answer is B.

A Firm Has a Current Capital Structure Consisting of $400,000