Unformatted text preview: indebtedness that results in the maximum price per share, P0.
Debt EPS ks 0% P0 10.0% 10 10.3 20 10.9 30 11.4 40 12.6 50 14.8 60 17.5 e. Prepare a recommendation to the board of directors of Morales Publishing,
Inc., that specifies the degree of indebtedness that will accomplish the firm’s
goal of optimizing shareholder wealth. Use your findings in parts a through d
to justify your recommendation.
LG3 LG4 LG5
LG6 12–24 Integrative—Optimal capital structure Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales, has
made the following three sales estimates, with their probabilities noted.
Sales Probability $ 600,000 .30 900,000 .40 1,200,000 .30 The firm wishes to analyze five possible capital structures—0, 15, 30, 45, and
60% debt ratios. The firm’s total assets of $1 million are assumed to be constant. Its common stock has a book value of $25 per share, and the firm is in the
40% tax bracket. The following additional data have been gathered for use in
analyzing the five capital structures...
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