IntegrativeOptimal capital structureMedallion Cooling Systems, Inc., has total assets of $10,600,000, EBIT of $1,960,000, and preferred dividends of $197,000 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, rd	Number of common stock shares	Required return, rs
0%	0%	195,000	11.9%
15	7.9	173,000	13.2
30	8.9	136,000	13.9
45	11.8	110,000	16.2
60	15.2	75,000	20.1

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

b. Use the equation

P0=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.

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	$	1,960,000
Less: Interest	$
EBT	$
Taxes @40%	$
Net profit	$
Less: Preferred dividends	$
Profits available to
common stockholders	$
# shares outstanding	$	195,000
EPS	$

Part 2

Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.)

Debt Ratio		15%
EBIT	$	1,960,000
Less: Interest	$
EBT	$
Taxes @40%	$
Net profit	$
Less: Preferred dividends	$
Profits available to
common stockholders	$
# shares outstanding	$	173,000
EPS	$

Part 3

Calculate the EPS below:(Round to the nearest dollar. Round the EPS to the nearest cent.)

Debt Ratio		30%
EBIT	$	1,960,000
Less: Interest	$
EBT	$
Taxes @40%	$
Net profit	$
Less: Preferred dividends	$
Profits available to
common stockholders	$
# shares outstanding	$	136,000
EPS	$

Part 4

Calculate the EPS below:(Round to the nearest dollar. Round the EPS to the nearest cent.)

Debt Ratio		45%
EBIT	$	1,960,000
Less: Interest	$
EBT	$
Taxes @40%	$
Net profit	$
Less: Preferred dividends	$
Profits available to
common stockholders	$
# shares outstanding	$	110,000
EPS	$

Part 5

Calculate the EPS below: (Round to the nearest dollar. Round the EPS to the nearest cent.)

Debt Ratio		60%
EBIT	$	1,960,000
Less: Interest	$
EBT	$
Taxes @40%	$
Net profit	$
Less: Preferred dividends	$
Profits available to
common stockholders	$
# shares outstanding	$	75,000
EPS	$

Part 6

b. The price per share for the 0% level of indebtedness is $enter your response here. (Round to the nearest cent.)

The price per share for the 15% level of indebtedness is __

The price per share for the 30% level of indebtedness is __

The price per share for the 45% level of indebtedness is __

The price per share for the 60% level of indebtedness is __

Part 11

c. Choose the optimal capital structure. Justify your choice. (Select the best answer below.)

A.The optimal capital structure would be 30% debt and 70% equity because this is the debt/equity 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 debt/equity mix that maximizes the price of the common stock.

C.The optimal capital structure would be 60% debt and 40% equity because this is the debt/equity mix that maximizes the price of the common stock.

D.The optimal capital structure would be 15% debt and 85% equity because this is the debt/equity mix that maximizes the price of the common stock.