A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT isexpected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are
A) ($0, $48,000) and ($200,000, $1.82)
B) ($152,000, $3.50) and ($150,000, $1.82)
C) ($36,000, $0) and ($200,000, $3.04)
D) ($48,000, $0) and ($200,000, $1.82)

Question

Quizplus · Accepted Answer

The interest on debt is $48,000 (12% of $400,000). At EBIT of $48,000, EPS is $0 because all earnings go to interest. At EBIT of $200,000, after interest and taxes, EPS is $1.82.

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