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Unformatted text preview: ure. Lewis believes that the current capital structure, which contains 10% debt and 90% equity, may lack adequate financial leverage. To evaluate the firm’s capital structure, Lewis has gathered the data summarized in the following table on the current capital structure
(10% debt ratio) and two alternative capital structures—A (30% debt ratio) and
B (50% debt ratio)—that he would like to consider.
Source of capital Current
(10% debt) A
(30% debt) B
(50% debt) Long-term debt $1,000,000 $3,000,000 $5,000,000 9% 10% 12% 100,000 shares 70,000 shares 40,000 shares 12% 13% 18% Coupon interest rateb
Required return on equity, ksc
aThese structures are based on maintaining the firm’s current level of $10,000,000 of total financing.
rate applicable to all debt.
cMarket-based return for the given level of risk.
bInterest Lewis expects the firm’s earnings before interest and taxes (EBIT) to remain at
its current level of $1,200,000. The firm has a 40% tax rate....
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This document was uploaded on 03/30/2014.
- Spring '14