LG1 LG3 LG4 ST13-2 Optimal capital structure Hawaiian Macadamia Nut Company competes in an industry where the required return on assets TA, is 10%. Under M&M Proposition Two, what is the firm's cost of equity, ry, and weighted average cost of capital under each capital structure below? D/E ratio 0% 10 10 20 Cost of Debt, rd 3.0% 3.0 3.0 30 3.5 26 632 633 634 635 Bonus manegerial.... < 40 3.8 50 4.0 634 > hp you recommend? Why? What if the tax rate is higher, say 35%? LG1 P13-13 EBIT-EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 21% tax rate. Source of capital Structure A Structure B Long-term debt $75,000 at 16% $50,000 at 15% coupon rate $10,000 with an 18% Preferred stock annual dividend Common stock 8,000 shares coupon rate $15,000 with an 18% annual dividend 10,000 shares 2 33 33 634 a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Graph the two capital structures on the same set of EBIT-EPS axes. c. Discuss the leverage and risk associated with each of the structures. d. Over what range of EBIT is each structure preferred? e. Which structure do you recommend if the firm expects its EBIT to be $35,000? LG2 635 s manegerial.... P13-14 Modigliani & Miller Propositions You operate an all-equity financed company in perfect markets and generate a net operating profit of $450,000. Your firm has just sold $1.8 million worth < 638 > hp 7:35 PM 4/24/2024 R