Starstruck Company would like to determine its optimal capital structure. Several of its managers believe that the best method is to rely on estimated earnings per share (EPS) of the firm because they believe that profits and stock price are closely related. The financial managers have suggested another method that uses estimated required returns to estimate the share value of the firm. The following financial data are available.

Capital Structure Debt Ratio	Estimated EPS	Estimated Required Return
0%	$1.75	11.40%
10%	$1.90	11.80%
20%	$2.25	12.50%
30%	$2.55	13.25%
40%	$3.10	18.00%
50%	$3.16	19.00%
60%	$3.02	25.00%

To Do

Based on the given financial data, create a spreadsheet to calculate the estimated share values associated with the seven alternative capital structure. Refer to Table 13.15.

Use Excel to graph the relationship between capital structure and the estimated EPS of

the firm. What is the optimal debt ratio? Refer to Figure 13.7.

Use Excel to graph the relationship between capital structure and the estimated share

value of the firm. What is the optimal debt ratio? Refer to Figure 13.7.

Do both methods lead to the same optimal capital structure? Which method do you favor?

Explain.