Questions A-B

Integrative-Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $9,600,000, EBIT of $2,000,000, and preferred dividends of $199,000 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, 0% 7.8 8.9 11.9 14.7 Number of common stock shares 200.000 175,000 141,000 111,000 83,000 Required return, is 12.1% 13.2 14.3 16.3 20.2 a. Calculate earnings per share for each level of indebtedness. b. Use the equation Po=EPS/rs and the earnings per share calculated in part (a) to calculate a price per share for each level of indebtedness