Unformatted text preview: on debt, kd
0.0% Expected EPS Required
return, ks $3.60 10.0% 15 8.0 4.03 10.5 30 10.0 4.50 11.6 45 13.0 4.95 14.0 60 17.0 5.18 20.0 a. Calculate the amount of debt, the amount of equity, and the number of
shares of common stock outstanding for each of the capital structures being
b. Calculate the annual interest on the debt under each of the capital structures
being considered. (Note: The interest rate given is applicable to all debt associated with the corresponding debt ratio.)
c. Calculate the EPS associated with $150,000 and $250,000 of EBIT for each
of the five capital structures being considered.
d. Using the EBIT–EPS data developed in part c, plot the capital structures on
the same set of EBIT–EPS axes, and discuss the ranges over which each is
preferred. What is the major problem with the use of this approach?
e. Using the valuation model given in Equation 11.12 and the appropriate
data, estimate the share value for each of the capital structures being
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