Integrative-Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $9,500,000, EBIT of $1,970,000, 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 0% 15 30 45 60 Cost of debt, rd 0% 8.2 8.7 11.9 15.1 Number of common stock shares 202,000 173,000 142,000 106,000 81,000 Required return, 12.2% 12.8 13.9 15.8 20.1 a. Calculate earnings per share for each level of indebtedness. b. Use the equation Po=EPS/r, 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. GA $ $ $ a. Calculate earnings per share for each level of indebtedness. Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.) Debt Ratio 0% EBIT 1,970,000 Less: Interest $ EBT $ Taxes @40% $ Net profit $ Less: Preferred dividends $ Profits available to common stockholders $ #shares outstanding $ 202.000 EPS $ Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.) 15% Debt Ratio EBIT 02 1,970,000 GA $ $ Debt Ratio 15% EBIT 1.970,000 Less: Interest $ EBT $ Taxes @40% $ Net profit $ Less: Preferred dividends $ Profits available to common stockholders $ # shares outstanding $ 173,000 EPS $ Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent) Debt Ratio 30% EBIT 1,970,000 Less: Interest $ $ EBT $ $ $ GA 30% 1.970,000 S $ $ Debt Ratio EBIT Less: Interest Taxes 40% Net profit Less: Preferred dividends Profits available to common stockholders # shares outstanding EPS ml $ $ $ 142.000 $ Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent) Debt Ratio 45% EBIT $ 1,970,000 Less: Interest $ EBT $ $ EBT $ Taxes @40% $ Net profit s Less: Preferred dividends $ Profits available to common stockholders $ # shares outstanding $ 108,000 EPS $ Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.) 60% S 1,970,000 $ $ Debt Ratio EBIT Less: Interest EBT Taxes @40% Net profit Less: Preferred dividends $ III $ $ Less: Preferred dividends Profits available to common stockholders #shares outstanding EPS $ 81,000 $ $ b. The price per share for the 0% level of indebtedness is $. (Round to the nearest cent) The price per share for the 15% level of indebtedness is SO. (Round to the nearest cent.) The price per share for the 30% level of indebtedness is $). (Round to the nearest cent.) The price per share for the 45% level of indebtedness is $. (Round to the nearest cent.) The price per share for the 80% level of indebtedness is $. (Round to the nearest cent.) c. Choose the optimal capital structure. Justify your choice. Select the best answer below.) A. The optimal capital structure would be 60% debt and 40% equity because this is the debtlequity mix that maximizes the price of the common stock. B. The optimal capital structure would be 45% debt and 55% equity because this is the debtlequity mix that maximizes the price of the common stock. C. The optimal capital structure would be 15% debt and 85% equity because this is the debtlequity mix that maximizes the price of the common stock. D. The optimal capital structure would be 30% debt and 70% equity because this is the debtlequity mix that maximizes the price of the common stock. Enter any number in the edit fields and then continue to the next question. OOO
