Calculate earnings per share for each level of indebtedness

Assignment Help Financial Management

Reference no: EM131928187

Integrative Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $9,400,000, EBIT of $2,010,000, and preferred dividends of $199,000 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:

Capital Structure Debt Ratio	Cost of Debt	Number of Common stock shares	Required Return
0%	0%	202,000	11.7%
15	7.8	173,000	13.2
30	9.2	136,000	13.8
45	11.9	110,000	15.9
60	14.9	80,000	19.9

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

b. Use the equation Upper P 0 equals EPS divided by r Subscript sP0=EPS/rs and the earnings per share calculated in part ?(a?) to calculate a price per share for each level of indebtedness.

c. Choose the optimal capital structure. Justify your choice.

Debt Ratio 0%

EBIT	$
Less: Interest	$
EBT	$
Taxes @40%	$
Net Profit	$
Less: Preferred Dividends	$
Profits Availiable to common stock holders	$
# of shares outstanding	$
EPS	$

Reference no: EM131928187

Questions Cloud

Explain in words why the present values would be higher : If the interest rate is 4 percent instead of 6 percent, please explain in words why the present values would be higher.

How the bond price will be expected to adjust across time : Given the problem above, identify how the bond price will be expected to adjust across time as the bond approaches maturity.

What is weekly economic profit : If John's weekly accounting profit is $1,000 per week, what is his weekly economic profit? Was this a good decision for John?

What is the price of a 10 month forward contract to buy : If the spot exchange rate is 1.5 dollars per pound, what is the price of a 10 month forward contract to buy the British pound?

Calculate earnings per share for each level of indebtedness : Calculate earnings per share for each level of indebtedness.Choose the optimal capital structure. Justify your choice.

Create a schedule of cost of goods manufactured : Prepare a schedule of cost of goods sold. Create a schedule of cost of goods manufactured. Assume all raw materials used in production were direct materials.

Direct method for cost allocation : Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration

How long would it have taken eileen to save : How long would it have taken Eileen to save for the outright purchase of the car if she did not have any credit card debt and used.

What is the balloon payment for the mortgage : A 4.41% balloon mortgage for $259,754 has the terms 25/3. The remaining balance at the end of the initial period is $241,470.00.

User Account

All Pages