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Q: Integrative – Optimal capital structure ( No Answer,   0 Comments )
Question  
Subject: Integrative – Optimal capital structure
Category: Business and Money > Finance
Asked by: help123-ga
List Price: $12.00
Posted: 29 Mar 2005 12:27 PST
Expires: 01 Apr 2005 19:23 PST
Question ID: 502174
I need this answer by Friday, April 1st 
X Company has total assets of $10,000,000, EBIT of $2,000,000, and
preferred dividends of $200,000 and is taxed at a rate of 40%. In an
effort to determine the optimal capital structure, the firm has
assembled data on the cost of debt, the number of common shares for
various levels of indebtedness, and the overall required return on
investment:

Capital Structure 		        Number of 	   
Debt Ratio 	   Cost of debt, kd   Common Shares 	Required Return, ks
    0%			0%	        200,000	                12%
   15			8		170,000		        13
   30		        9 	        140,000			14
   45		       12	        110,000			16
   60		       15		80,000			20

a)	Calculate earnings per share for each level of indebtedness.
b)	Use this equation (Po = EPS/Ks) and the earnings per share
calculated in part a to calculate a price per share for each level on
indebtedness.
c)	Choose the optimal capital structure. Justify your choice.
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