Unformatted text preview: ew printing technology
development over that period. On the basis of this scenario, the firm’s management has been instructed by its board to institute programs that will allow it to
operate more efficiently, earn higher profits, and, most important, maximize
share value. In this regard, the firm’s chief financial officer (CFO), Jon Lawson,
has been charged with evaluating the firm’s capital structure. Lawson believes
that the current capital structure, which contains 10% debt and 90% equity,
may lack adequate financial leverage. To evaluate the firm’s capital structure,
Lawson has gathered the data summarized in the following table on the current
capital structure (10% debt ratio) and two alternative capital structures—A
(30% debt ratio) and B (50% debt ratio)—that he would like to consider.
Source of capital Current
(10% debt) A
(30% debt) B
(50% debt) Long-term debt $1,000,000 $3,000,000 $5,000,000 9% 10% 12% 100,000 shares 70,000 shares 40,000 shares 12% 13% 18% Coupon interest rateb
Required return on...
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