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. |