Question
Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales, has made the following three sales estimates,
Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales, has made the following three sales estimates, with their probabilities noted.
Sales | Probability |
$600,000 | .30 |
900,000 | .40 |
1,200,000 | .30 |
The firm wishes to analyze five possible capital structures: 0%, 15%, 30%, 45% and 60% debt ratios. The firms total assets of $1 million are assumed to be constant. Its common stock has a book value of $25 per share, and the firm is in the 40% tax bracket. The following additional data have been gathered for use in analyzing the five capital structures under consideration.
Capital Structure Debt Ration | Before Tax Cost of Debt | Required |
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