Structure A is a 100% equity structure with 150,000 shares outstanding and a $500,000 market value.
Structure B is a 50/50 debt equity split with a total market value of $500,000
The rate on the debt will be 10%. Assume a tax rate of 35% and a projected EBIT of $75,000
|
Structure A
|
|
Structure B
|
|
EBIT
|
75,000
|
75,000
|
|
Interest
|
0
|
25,000
|
|
Taxes
|
26,250
|
17,500
|
|
Net Income
|
48,750
|
32,500
|
|
EPS
|
.325
|
.217
|
|
ROE
|
9.75%
|
13%
|
What structure provides the better results for the company?
Does including taxes in the analysis make a difference in the results?
What is the primary impact of financial leverage on stockholders?