CHAPTER 12 Leverage and Capital Structure 545LG5LG3 LG6LG1d. Using the EBIT associated with the $750,000 level of sales as a base,calcu-
late the firm’s degree of financial leverage (DFL).
e. Use the degree of total leverage (DTL) concept to determine the effect (in per-
centage terms) of a 50% increase in TOR’s sales from the $750,000 base
levelon its earnings per share.ST 12–2 EBIT–EPS analysis Newlin Electronics is considering additional financing of
$10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000
shares of common stock outstanding. The firm can obtain the financing through
a 12% (annual interest) bond issue or through the sale of 1,000 shares of com-
mon stock. The firm has a 40% tax rate.
a. Calculate two EBIT–EPS coordinates for each plan by selecting any two EBIT
values and finding their associated EPS values.
b. Plot the two financing plans on a set of EBIT–EPS axes.
c. On the basis of your graph in part b,at what level of EBIT does the bond
plan become superior to the stock plan?ST 12–3 Optimal capital structure Hawaiian Macadamia Nut Company has collected
the following data with respect to its capital structure, expected earnings per
share, and required return.a. Compute the estimated share value associated with each of the capital struc-
tures, using the simplified method described in this chapter (see Equation
12.12).
b. Determine the optimal capital structure on the basis of (1) maximization of
expected earnings per share and (2) maximization of share value.
c. Which capital structure do you recommend? Why?PROBLEMS
12 – 1 Breakeven point—Algebraic Kate Rowland wishes to estimate the number of
flower arrangements she must sell at $24.95 to break even. She has estimated
fixed operating costs of $12,350 per year and variable operating costs of $15.45
per arrangement. How many flower arrangements must Kate sell to break even
on operating costs?Capital structure Expected earnings Required
debt ratio per share return, ks0% $3.12 13%
10 3.90 15
20 4.80 16
30 5.44 17
40 5.51 19
50 5.00 20
60 4.40 22