CHAPTER 12 Leverage and Capital Structure 529TABLE 12.12 Calculation of EPS for Selected
Debt Ratios ($000) for Cooke
Company
Probability of EBIT .25 .50 .25Debt Ratio0%EBIT (Table 12.9) $ 0.00 $100.00 $200.00Less: Interest (Table 12.11) (^0) . (^0) (^0) (^0) . (^0) (^0) (^0) . (^0) (^0)
Net profits before taxes $ 0.00 $100.00 $200.00
Less: Taxes (T0.40) (^0) . (^0) (^0) (^4) (^0) . (^0) (^0) (^8) (^0) . (^0) (^0)
Net profits after taxes $ 0.00 $ 60.00 $120.00
EPS (25.0 shares, Table 12.10) $
0
.
0
0
$
2
.
4
0
$
4
.
8
0
Expected EPSa $ 2.40
Standard deviation of EPSa $ 1.70
Coefficient of variation of EPSa 0.71
Debt Ratio30%
EBIT (Table 12.9) $ 0.00 $100.00 $200.00
Less: Interest (Table 12.11) (^1) (^5) . (^0) (^0) (^1) (^5) . (^0) (^0) (^1) (^5) . (^0) (^0)
Net profits before taxes ($15.00) $ 85.00 $185.00
Less: Taxes (T0.40) ( (^6) . (^0) (^0) )b (^3) (^4) . (^0) (^0) (^7) (^4) . (^0) (^0)
Net profits after taxes ($ 9.00) $ 51.00 $111.00
EPS (17.50 shares, Table 12.10) ($
0
.
5
1
)$
2
.
9
1
$
6
.
3
4
Expected EPSa $ 2.91
Standard deviation of EPSa $ 2.42
Coefficient of variation of EPSa 0.83
Debt Ratio60%
EBIT (Table 12.9) $ 0.00 $100.00 $200.00
Less: Interest (Table 12.11) (^4) (^9) . (^5) (^0) (^4) (^9) . (^5) (^0) (^4) (^9) . (^5) (^0)
Net profits before taxes ($49.50) $ 50.50 $150.50
Less: Taxes (T0.40) ( (^1) (^9) . (^8) (^0) )b (^2) (^0) . (^2) (^0) (^6) (^0) . (^2) (^0)
Net profits after taxes ($29.70) $ 30.30 $ 90.30
EPS (10.00 shares, Table 12.10) ($
2
.
9
7
)$
3
.
0
3
$
9
.
0
3
Expected EPSa $ 3.03
Standard deviation of EPSa $ 4.24
Coefficient of variation of EPSa 1.40
aThe procedures used to calculate the expected value, standard deviation, and coef-
ficient of variation were presented in Equations 5.2, 5.3, and 5.4, respectively, in
Chapter 5.
bIt is assumed that the firm receives the tax benefit from its loss in the current
period as a result of applying the tax loss carryback procedures specified in the tax
law (see Chapter 1).