1 2 3 Suppose XYZ Corporation operates (i) in a perfect capital market (ii) faces 40% namely 0.4 corporate income tax and (iii) has current asset value of $1000. Management expects operating profit (i.e., earnings before interest and taxes) of $200 in the coming year. 4 a)Calculate total expected income available to the suppliers of capital for the following three capital structures: 5 678922 10 11 Capital Structure 1: 100% equity Capital Structure 2: 70% equity, 30% debt with an annual interest of 10% Capital Structure 2: 30% equity, 70% debt with an annual interest of 10%. 15 pts b) Assuming 10% interest applies to any amount of debt, what is the optimal (namely the one that maximizes total expected income to suppliers of capital) 12 capital structure for this company? What is the resulting maximum expected income? 15 pts 13 Hint: fill the following table 14 15 Capital Structure 1 in $ Capital Structure 2 in $ Capital Structure 3 in $ Optimal Structure 16 Debt Operating 17 Earnings Interest 18 Expense Taxable Income 22 Taxes Earnings after taxes Total Income to Suppliers of Capital