Accounting B Ltd has total assets of $9 million, EBIT of $1,700,000, preference dividends of $100,000 and a tax rate of 28%. You are presented with the following information to determine the optimal capital structure for B Ltd: Required rate of return (%) Debt level Number of issued (%) Cost of debt (%) ordinary shares 200,000 12 30 9 140,000 14 40 14 120,000 18 a) Calculate earnings per share for each level of debt. b) Calculate the price per share for each level of debt. c) Based on your calculations in (b), what is B Ltd's optimal capital structure? Provide a reason for your answer.
Accounting B Ltd has total assets of $9 million, EBIT of $1,700,000, preference dividends of $100,000 and a tax rate of 28%. You are presented with the following information to determine the optimal capital structure for B Ltd: Required rate of return (%) Debt level Number of issued (%) Cost of debt (%) ordinary shares 200,000 12 30 9 140,000 14 40 14 120,000 18 a) Calculate earnings per share for each level of debt. b) Calculate the price per share for each level of debt. c) Based on your calculations in (b), what is B Ltd's optimal capital structure? Provide a reason for your answer.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Accounting
B Ltd has total assets of $9 million, EBIT of
$1,700,000, preference dividends of $100,000
and a tax rate of 28%.
You are presented with the following
information to determine the optimal capital
structure for B Ltd:
Required rate of
return (%)
Debt level
Number of issued
(%)
Cost of debt (%)
ordinary shares
200,000
12
30
9
140,000
14
40
14
120,000
18
a) Calculate earnings per share for each level of
debt.
b) Calculate the price per share for each level of
debt.
c) Based on your calculations in (b), what is B
Ltd's optimal capital structure? Provide a reason
for your answer.
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