Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Absolute Corporation currently has $30 million in liabilities and common equity in combination. The firm has no preferred stock. The CFO constructed the following table

Absolute Corporation currently has $30 million in liabilities and common equity in combination. The firm has no preferred stock. The CFO constructed the following table to show the CEO the effect of changing the firm's capital structure.

Amount of Debt
in the Capital Earnings per Market Price per
Structure Share (EPS) Share (P0)
$ 9,000,000 $ 3.00 $ 112.85
12,000,000 3.80 116.60
15,000,000 4.40 119.25

According to this information, what is Absolute's optimal capital structure? Explain your answer. Round your answer to the nearest whole number.

The optimal capital structure contains % of debt because it -Select-has the lowest amount of debt in the capital structureprovides the highest market price per share of stockprovides the highest earnings per shareItem 2 .

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technology And Finance Challenges For Financial Markets Business Strategies And Policy Makers

Authors: Morten Balling, Frank Lierman, Andy Mullineux

1st Edition

041529827X, 978-0415298278

More Books

Students also viewed these Finance questions