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Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40%. a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $25 per share. Calculation of the values of debt and equity as well as the total number of shares below. (Round to the nearest dollar. Round the number of shares to the nearest integer.) % Debt Total Assets Debt Equity No. of Shares 0% $ 40,900,000 $ (Round to the nearest dollar. Round the number of shares to the nearest integer.) % Debt Total Assets Debt Equity No. of Shares 10% S 40,900,000 $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer.) % Debt Total Assets Debt Equity No. of Shares 20% $ 40,900,000 $ (Round to the nearest dollar. Round the number of shares to the nearest integer.) Enter any number in the edit fields and then continue to the next question. Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. % Debt Total Assets Debt Equity No. of Shares 30% $ 40,900,000 $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer.) % Debt Total Assets Debt Equity No. of Shares 40% $ 40,900,000 $ (Round to the nearest dollar. Round the number of shares to the nearest integer.) % Debt Total Assets Debt Equity No. of Shares 50% $ 40,900,000 $ (Round to the nearest dollar. Round the number of shares to the nearest integer.) % Debt Total Assets Debt Equity No. of Shares 60% $ 40,900,000 $ $ Enter any number in the edit fields and then continue to the next question. ? Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, Is and the equation Po = 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, Po 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 b. Given the before-tax cost of debt at various levels of indebtedness, calculate the yearly interest expenses. (Round to the nearest dollar.) Before Tax Interest % Debt Debt Cost of Debt Expense 0% $ 0.0% $ (Round to the nearest dollar.) Before Tax Interest % Debt Debt Cost of Debt Expense 10% $ 7.7% $ (Round to the nearest dollar.) Before Tax Interest % Debt Debt Cost of Debt Expense 20% 8.2% Enter any number in the edit fields and then continue to the next question. Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, Is and the equation Po = 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, Po 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 Before Tax Interest % Debt Debt Cost of Debt Expense 30% $ 9.2% $ (Round to the nearest dollar.) Before Tax Interest % Debt Debt Cost of Debt Expense 40% 11.2% $ (Round to the nearest dollar.) Before Tax Interest % Debt Debt Cost of Debt Expense 50% $ 12.7% $ (Round to the nearest dollar.) Enter any number in the edit fields and then continue to the next question. IntegrativeOptimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. Before Tax Interest % Debt Debt Cost of Debt Expense 60% $ 15.7% $ c. Using EBIT of $8,010,000, a 40% 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. Calculate the most likely earnings per share: (Round to the nearest dollar. Round the number of shares to the nearest integer. Round the EPS to the nearest cent.) Interest Taxes % Debt Expense EBT @40% Net Income # of Shares EPS 0% S $ $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer. Round the EPS to the nearest cent.) Taxes Interest Expense % Debt EBT @40% Net Income # of Shares EPS 10% $ $ $ Enter any number in the edit fields and then continue to the next question. IntegrativeOptimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. TITLEIESE Taxts % Debt Expense EBT @40% Net Income # of Shares EPS 20% $ $ $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer. Round the EPS to the nearest cent.) Interest Taxes % Debt Expense EBT @40% Net Income # of Shares EPS 30% $ $ $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer. Round the EPS to the nearest cent.) Interest Taxes % Debt Expense EBT @40% Net Income # of Shares EPS 40% S $ S $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer. Round the EPS to the nearest cent.) Enter any number in the edit fields and then continue to the next question. Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. Interest Taxes % Debt Expense EBT @40% Net Income # of Shares EPS 50% $ $ $ $ (Round to the nearest dollar. Round the number of shares to the nearest integer. Round the EPS to the nearest cent.) Interest Taxes % Debt Expense EBT @40% Net Income # of Shares EPS 60% $ $ $ $ Mark the level of indebtedness that maximizes EPS. (Select the best answer below.) O A. The level of indebtedness that maximizes EPS is 60%. OB. The level of indebtedness that maximizes EPS is 30%. OC. The level of indebtedness that maximizes EPS is 50%. OD. The level of indebtedness that maximizes EPS is 40%. Enter any number in the edit fields and then continue to the next question. Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. d. Using the EPS developed in part (c), the estimates of required return, rs and the equation Po = 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, Po Calculate the price per share below: (Round to the nearest cent.) Required Return % Debt EPS Price 0% S 9.9% $ (Round to the nearest cent.) Required % Debt EPS Return Price 10% $ 10.2% S (Round to the nearest cent.) Enter any number in the edit fields and then continue to the next question. Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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. Required % Debt EPS Return Price 20% 10.8% $ (Round to the nearest cent.) Required % Debt EPS Return Price 30% 11.3% $ (Round to the nearest cent.) Required % Debt EPS Return Price 40% 12.5% S (Round to the nearest cent.) Enter any number in the edit fields and then continue to the next question. Integrative-Optimal capital structure The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,900,000. It has earnings before interest and taxes of $8,010,000 and is taxed at a rate of 40% a. Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $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 $8,010,000, a 40% 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, rs and the equation Po = 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, Po 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 % Debt EPS Return Price 50% S 14.7% S (Round to the nearest cent.) Required % Debt EPS Return Price 60% S 17.4% $ 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. (Select all that apply.) A. The optimal proportion of debt would be 30% with 70% equity. OB. 30% debt 70% equity will maximize the price per share of the firm's common stock and thus maximize shareholders' wealth. C. Beyond 30% debt level, the cost of capital increases to the point that it offsets the gain from the lower-costing debt financing. OD. Below 30% debt level, the cost of capital increases to the point that it offsets the gain from the lower-costing debt financing. Enter any number in the edit fields and then continue to the next
