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e. Which structure do you recommend if the firm expects its EBIT to be
LG3 LG4 LG6 12–21 Integrative—Optimal capital structure Medallion Cooling Systems, Inc., has
total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of
$200,000 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
common shares for various levels of indebtedness, and the overall required
return on investment:
0% Cost of debt, kd Number of
common shares Required return, ks 0% 200,000 12% 8 170,000 13 30 9 140,000 14 45 12 110,000 16 60 15 80,000 20 15 a. Calculate earnings per share for each level of indebtedness.
b. Use Equation 12.12 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. 552 PART 4 LG3 Long-Term Financial Decisions LG4 12–22 LG6 Integrative—Optim...
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