3. To turn your analysis above into an optimal capital structure, follow this stepbystep procedure. The calculation is designed to set debt as high as possible (to maximize the tax advantage of debt) without setting it so high so as to trigger high costs of nancial distress. A. Estimate the Enterprise Value: Estimate the total market value of the rm's operations (AKA Enterprise Value) as of the end of 1981. Call this "EV." Here you should use the current actual level of net Debt (D) and the current market value of Equity (E) to infer the market's current assessment of AHP's enterprise. The market value of AHP's equity at the end of 1981 is 5,248 M. . Estimate Operating Incomemc Use your variability analysis in question 1 to choose a "realistic worst case (RWC)" operating prot margin for AHP (OPMm). Justify your answer using the data in the case.2 Use Oerwc and AHP's sales in the current year (1981) to determine AHP's operating income in a realistic worst case scenario. In words, you are trying to form an estimate of what operating income would have been in 1981 had it been a bad year and 0PM have been low. . Select a Target Minimum Coverage Ratio Choose the target minimum interest coverage ratio in a realistic worst case scenario (h). In other words you are recommending a lower bound for AHPs coverage ratio (i.e. it will get this low in a bad year and will be above this in normal times). Your choice should be based on your assessment of vulnerability from question 2. As discussed in class, firms that are more vulnerable to the costs of financial distress should choose to have higher minimum interest coverage ratios. For h choose 1, 1.5, 2, 2.5, or 3 (where 1 corresponds to cases where the costs of distress are negligible and 3 corresponds to the case where they are high). . Calculate Maximum Interest: Use operating incomerwc and h to determine the highest interest payments (Max Int) that AHP could commit to in 1981 and ensure it will maintain a coverage ratio of It (even if it is a bad year and 0PM is low)