Unformatted text preview: nual interest) bonds and 10,000
shares of common stock outstanding. The firm can obtain the financing through
a 12% (annual interest) bond issue or through the sale of 1,000 shares of common stock. The firm has a 40% tax rate.
a. Calculate two EBIT–EPS coordinates for each plan by selecting any two EBIT
values and finding their associated EPS values.
b. Plot the two financing plans on a set of EBIT–EPS axes.
c. On the basis of your graph in part b, at what level of EBIT does the bond
plan become superior to the stock plan? LG6 ST 12–3 Optimal capital structure Hawaiian Macadamia Nut Company has collected
the following data with respect to its capital structure, expected earnings per
share, and required return.
0% Expected earnings
13% 10 3.90 15 20 4.80 16 30 5.44 17 40 5.51 19 50 5.00 20 60 4.40 22 a. Compute the estimated share value associated with each of the capital structures, using the simplified method described in this...
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