Integrativelong dashOptimal

capital structureThe board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of

$ 39 comma 600 comma 000$39,600,000.

It has earnings before interest and taxes of

$ 8 comma 080 comma 000$8,080,000

and is taxed at a rate of

26 %26%.

a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of

$ 25$25

per share.

b. Given the before-tax cost of debt at various levels of indebtedness, calculate the yearly interest expenses.

c. Using EBIT of

$ 8 comma 080 comma 000$8,080,000,

a

26 %26%

tax rate, and the information developed in parts

(a)

and

(b),

calculate the most likely earnings per share for the firm at various levels of indebtedness. Mark the level of indebtedness that maximizes EPS.

d. Using the EPS developed in part

(c),

the estimates of required return,

r Subscript srs

and the equation

Upper P 0 equals EPS divided by r Subscript sP0=EPS/rs,

estimate the value per share at various levels of indebtedness. Mark the level of indebtedness in the following table that results in the maximum price per share,

Upper P 0P0.

e. Prepare a recommendation to the board of directors of Morales Publishing that specifies the degree of indebtedness that will accomplish the firm's goal of optimizing shareholder wealth. Use your findings in parts

(a)

through

(d)

to justify your recommendation.