Tampa Manufacturing, an established producer of printing equipment, expects its sales to remain flat for the next 3 to 5 years because of both a weak economic outlook and an expectation of little new printing technology development over that period. On the basis of this scenario, the firm?s board has instructed its management to institute programs that will allow it to operate more efficiently, earn higher profits, and, most importantly, maximize share value. In this regard, the firm?s chief financial officer, Jon Lawson, has been charged with evaluating the firm?s capital structure. Lawson believes that the current capital structure, which contains 10% debt and 90% equity, may lack adequate financial leverage. To evaluate the firm?s capital structure, Lawson has gathered the data summarized in the attached table on the current capital structure (10% debt ratio) and two alternative capital structures ? A (30% debt ratio) and B (50% debt ratio) ? that he would like to consider. Lawson expects the firm?s earnings before interest and taxes to remain at its current level of $1,200,000. The firm has a 40% tax rate.

Source of Capital Long Term Debt Coupon Interest Rate** Common Stock Required Return on Equity*** Capital Structure Current A B 10% debt 30% debt 50% debt $1,000,000 $3,000,000 $5,000,000 9% 10% 12% 100,000 shares 70,000 shares 40,000 shares 12% 13% 18% * These structures are based on maintaining the firm's current level of $10,000,000 of total financing ** Interest rate applicable to all debt *** Market-based return for the given level of risk