The board of directors of Mona Publishing, Inc., has commissioned a capital structure study. The company has

Question:

The board of directors of Mona Publishing, Inc., has commissioned a capital structure study. The company has total assets of US$40,000,000. It has earnings before interest and taxes of US$8,000,000 and is taxed at a rate of 40 percent. a. Create a spreadsheet like the one in Table 12.10 showing values of debt and equity as well as the total number of shares, assuming a book value of US$25 per share.
The board of directors of Mona Publishing, Inc., has commissioned

b. Given the before-tax cost of debt at various levels of indebtedness, calculate the yearly interest expenses.

The board of directors of Mona Publishing, Inc., has commissioned

c. Using EBIT of US$8,000,000, a 40 percent tax rate, and the information developed in parts a and b, calculate the most likely earnings per share for the firm at various levels of indebtedness. Mark the level of indebtedness that maximizes EPS.

The board of directors of Mona Publishing, Inc., has commissioned

d. Using the EPS developed in part c, the estimates of required return, rs, and Equation 12.12, estimate the value per share at various levels of indebtedness. Mark the level of indebtedness in the following table that results in the maximum price per share, P0.

The board of directors of Mona Publishing, Inc., has commissioned

e. Prepare a recommendation to the board of directors of Mona Publishing that specifies the degree of indebtedness that will accomplish the firm's goal of optimizing share- holder wealth. Use your findings in parts a through d to justify your recommendation.

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Principles of Managerial Finance

ISBN: 978-1408271582

Arab World Edition

Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix

Question Posted: