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Salam Corporation has total assets of RM10, 000,000, EBIT of RM2, 000,000 and it is taxed at a rate of 40%. In an effort to
Salam Corporation has total assets of RM10, 000,000, EBIT of RM2, 000,000 and it 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 debt ratio, and the overall required return on investment: Capital structure debt Cost of debt, r, No. of common stock Required return, r ratio shares 0% 0% 200,000 12% 15 8 170,000 13 30 9 140,000 14 45 12 110,000 16 60 15 80,000 20 Required: a) Calculate earnings per share for each level of debt ratio. b) Based on your answer in part (a), calculate the EPS for each level of debt ratio. c) Calculate WACC for each level and determine the optimal capital structure. d) Choose the optimal capital structure
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