An entrepreneur is planning to establish a company with $50 million in assets
and is investigating three possible capital structures for the company: (i) no debt;
(ii) 20 per cent debt; and (iii) 50 per cent debt. The interest rate on the debt is 10
per cent per annum. The entrepreneur believes that the annual earnings before
interest and tax will be $2.5 million in a poor year, $5 million in an average year
and $10 million in a good year.
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