a. Calculate earnings per share for each level of indebtedness. Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.) Debt Ratio EBIT Less: Interest EBT Taxes @40% Net profit Less: Preferred dividends Profits available to common stockholders #shares outstanding EPS $ $ $ $ $ $ $ $ 0% 2,000,000 202,000

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Integrative-Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,200,000, EBIT of $2,000,000, and preferred dividends of $197,000 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 shares of common stock for various levels of indebtedness, and the overall required return on investment:
Capital structure
debt ratio
0%
15
30
45
60
Debt Ratio
EBIT
Less: Interest
EBT
Taxes @40%
Net profit
Less: Preferred
dividends
EPS
Profits available to
common stockholders
# shares outstanding
a. Calculate earnings per share for each level of indebtedness.
b. Use the equation Po EPS/r, and the earnings per share calculated in part (a) to calculate a price per share for each level of indebtedness.
c. Choose the optimal capital structure. Justify your choice.
a. Calculate earnings per share for each level of indebtedness.
Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.)
Cost of debt, rd
0%
7.8
9.1
12.1
14.7
$
$
$
$
$
$
$
$
$
Number of common
stock shares
0%
2,000,000
202,000
174,000
141,000
110,000
76,000
202,000
Required return, rs
11.7%
13.2
14.2
16.2
19.9
Transcribed Image Text:Integrative-Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,200,000, EBIT of $2,000,000, and preferred dividends of $197,000 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 shares of common stock for various levels of indebtedness, and the overall required return on investment: Capital structure debt ratio 0% 15 30 45 60 Debt Ratio EBIT Less: Interest EBT Taxes @40% Net profit Less: Preferred dividends EPS Profits available to common stockholders # shares outstanding a. Calculate earnings per share for each level of indebtedness. b. Use the equation Po EPS/r, and the earnings per share calculated in part (a) to calculate a price per share for each level of indebtedness. c. Choose the optimal capital structure. Justify your choice. a. Calculate earnings per share for each level of indebtedness. Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.) Cost of debt, rd 0% 7.8 9.1 12.1 14.7 $ $ $ $ $ $ $ $ $ Number of common stock shares 0% 2,000,000 202,000 174,000 141,000 110,000 76,000 202,000 Required return, rs 11.7% 13.2 14.2 16.2 19.9
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