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Determine optimal capital structure

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Question - Moses Company has a total asset of 400,000 of which 30% is debt with 12% interest and 70% is equity. This is the current capital structure and Moses earns EBIT of br. 40,000. However, Moses panned to get involved in investment of br. 100,000 that would increase his current income from br. 40,000 to br. 60,000. To mobilize br. 100,000 required for invest assume the following two options are available

A. Issuing shares of 1000 each at br. 100

B. Selling bond costing br. 100,000 that bears interest rate of 12.5%

Given the above data and assuming that there is no preferred stock in capital structure

I. Determine optimal capital structure.

II. Calculate degree of financial leverage taken into account 50% tax rate.

III. Calculate EBIT and EPS at breakeven point.

IV. Decide whether pan A or plan B is better.

Reference no: EM132609187

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