A corporation is considering two alternative capital structures with the following characteristics:
Debt to Asset ratio 0.3 0.7
Debt cost 10% 14%
The firm will have total assets of $500,000, a tax rate of 40%, and a book value per share of $10, regardless of the capital structure. EBIT is expected to be $200,000 for the coming year. What is the difference between the two alternatives?
The solution evaluates two alternative capital structures for a corporation using EBIT/EPS analysis.