Integrative Optimal capital structureMedallion CoolingSystems, has total assets of $10,300,000, EBIT of $2,010,000, and preferred dividends of $201,000 and is taxed at a rate of 40 %.

In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment:

Capital structure debt ratio	Cost of debt, r Subscript drd	Number of common stock shares	Required return, r Subscript srs
0 %	0 %	196,000	12.2%
15	8.1	171,000	13.2
30	9.2	136,000	14.2
45	12.1	108,000	15.8
60	14.9	81,000	19.8

a. Calculate earnings per share for each level of indebtedness.

b. Use the equation Upper P 0 equals EPS divided by r Subscript sP0=EPS/rs and the earnings per share calculated in part

(a) to calculate a price per share for each level of indebtedness.

c. Choose the optimal capital structure. Justify your choice.

P13-24 (similar to) Cele Ca b. Use the Choose aming para Panthe r t h e 10