Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000.
a) Calculate two EBIT-EPS coordinates for each of the structures.
(b) Indicate over what EBIT range, if any, each structure is preferred
(a)
(b) Calculation of indifference point
EPS (Structure 1) = EPS (Structure 2)
(EBIT - $40,000)(1 - 0.40)/10,000 = (EBIT - $24,500)(1 - 0.40)/20,000
If EBIT is expected to be less than $55,500, structure 2 will maximize EPS. If EBIT is expected to be greater than $55,500, Structure 1 will maximize EPS.
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The Frank Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300,000 and common stock with a total par value of $900,000. Dividends for one previous year are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222,000 are distributed at the end of the current year?
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