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Linda_us, Finance, Accounts & Homework Tutor
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Experience:  Post Graduate Diploma in Management (MBA)
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A company , has EBIT of $2,000,000,total assets of $20,000,000,

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A company , has EBIT of $2,000,000,total assets of $20,000,000, preferred dividends of $250,000 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 shares of common stock for various levels of indebtedness, and the overall required return on investment:
Cost of debt, kd No. of common stock shares Required return, ks
0.00% 200000 10.00%
10.00% 170000 11.00%
9.00% 150000 12.00%
13.00% 110000 14.00%
11.50% 80000 13.00%

a. Calculate earnings per share for each level of indebtedness.

Use this grid for your answer.

Debt Ratio 0.00% 15.00% 30.00% 45.00% 60.00%


Less Interest


Taxes at 40%

Net Profit

Less Preferred Div

Profits available to
common stockholders

Number of Shares

b.calculate the price per share for each
level of indebtedness.

c. Choose the best capital structure. Why?
Thanks for requesting me.

Whats your deadline for this question.
Customer: replied 4 years ago.

Hello Linda,

There is no extreme hurry, this is an example to the other problems I am working on. I just want to compare to make sure Im understanding the work correctly. Not sure how busy you are tonight.

Thanks, Tony



I am working on it and will post the solution as I am done.
Customer: replied 4 years ago.

Thank you

Can you please recheck figures. The cost of debt is rising, decreasing, then rising again and then again decreasing?

Also please check for equity?
Customer: replied 4 years ago.

Yes those numbers are correct, maybe thats why Im having some difficulty


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