Medallion Cooling Systems, has total assets of $10,900,000, EBIT of $1,990,000, and preferred dividends of $205,000 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 Cost of debt, rd Number of common stock shares Required return, rs 0% 0% 198,000 12.1% 15 7.9 171,000 13.2 30 8.9 141,000 13.8 45 12.1 107,000 16.1 60 14.9 76,000 20.1 a. Calculate earnings per share for each level of indebtedness. Debt Ratio 0% EBIT $ 1,990,000 Less: Interest $ EBT $ Taxes @40% $ Net profit $ Less: Preferred dividends $ Profits available to common stockholders $ # shares outstanding $ 198,000 EPS $ b. Use the equation P0=EPS/rs 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.
Medallion Cooling Systems, has total assets of $10,900,000, EBIT of $1,990,000, and preferred dividends of $205,000 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 Cost of debt, rd Number of common stock shares Required return, rs 0% 0% 198,000 12.1% 15 7.9 171,000 13.2 30 8.9 141,000 13.8 45 12.1 107,000 16.1 60 14.9 76,000 20.1 a. Calculate earnings per share for each level of indebtedness. Debt Ratio 0% EBIT $ 1,990,000 Less: Interest $ EBT $ Taxes @40% $ Net profit $ Less: Preferred dividends $ Profits available to common stockholders $ # shares outstanding $ 198,000 EPS $ b. Use the equation P0=EPS/rs 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.
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
Related questions
Question
Medallion Cooling Systems, has total assets of $10,900,000, EBIT of $1,990,000, and preferred dividends of $205,000
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:
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
|
Cost of debt, rd
|
Number of common
stock shares
|
Required return, rs
|
|
0%
|
0%
|
198,000
|
12.1%
|
|
15
|
7.9
|
171,000
|
13.2
|
|
30
|
8.9
|
141,000
|
13.8
|
|
45
|
12.1
|
107,000
|
16.1
|
|
60
|
14.9
|
76,000
|
20.1
|
a. Calculate earnings per share for each level of indebtedness.
|
Debt Ratio
|
|
0%
|
|
EBIT
|
$
|
1,990,000
|
|
Less: Interest
|
$
|
|
|
EBT
|
$
|
|
|
Taxes @40%
|
$
|
|
|
Net profit
|
$
|
|
|
Less: Preferred
dividends |
$
|
|
|
Profits available to
|
|
|
|
common stockholders
|
$
|
|
|
# shares outstanding
|
$
|
198,000
|
|
EPS
|
$
|
|
b. Use the equation P0=EPS/rs 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.
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