ST12–3 Optimal capital structure Hawaiian Macadamia Nut Company has collected the data in the following table with respect to its capital structure, expected earnings per share, and required return.

a. Compute the estimated share value associated with each of the capital structures, using the simplified method described in this chapter (see Equation 12.12).

b. Determine the optimal capital structure on the basis of (1) maximization of expected earnings per share and (2) maximization of share value.

c. Which capital structure do you recommend? Why?

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Capital structure Expected Required earnings debt ratio per share return, T 0% $3.12 13% 10 3.90 15 20 4.80 16 30 5.44 17 40 5.51 19 50 5.00 20 60 4.40 22