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
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
Problem 1PS
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Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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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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