Table 15.2 Alternative capital structures for TAC
Current structure,no debt
Proposed structure,debt= 4,000,000
Recession
Expected
Expansion
Recession
Expected
Expansion
Return on assets
5%
15%
25%
5%
15%
25%
EBI
400,000
1,200,000
2,000,000
400,000
1,200,000
2,000,000
Interest
0
0
0
400,000
400,000
400,000
Earnings after interest
400,000
1,200,000
2,000,000
0
800,000
1,600,000
Return on equity
5%
15%
25%
0
20%
40%
Earnings per share
1.00
3.00
5.00
0
4.00
8.00
When EBI is high,TAC has higher EPS and ROE with the proposed structure than with the current structure,When EBI is low,TAC has lower EPS and ROE with the structure,Thus,the equityholders bear more risk with the proposed structure.