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Unformatted text preview: method (see Equation 12.12).
a. Calculate the expected earnings per share (EPS), the standard deviation of
EPS, and the coefficient of variation of EPS for the three proposed capital
b. Determine the optimal capital structure, assuming (1) maximization of earnings per share and (2) maximization of share value.
c. Construct a graph (similar to Figure 12.7) showing the relationships in
part b. (Note: You will probably have to sketch the lines, because you have
only three data points.) CHAPTER 12 LG3 LG4 LG5
LG6 12–23 553 Leverage and Capital Structure Integrative—Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total
assets of $40,000,000. It has earnings before interest and taxes of $8,000,000
and is taxed at 40%.
a. Create a spreadsheet like the one in Table 12.10 showing values of debt and
equity as well as the total number of shares, assuming a book value of $25
% Debt Tota...
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