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P13-26-Integrative; optimal capital structure. The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $40,000,000. It has earnings before interest and taxes of $8,000,000 and it is taxed at a rate of40%

a) Create a spreadsheet like the one in Table 13.10 showing values of debt and equity as well as the total number of shares assuming a book value of $25 per share.

% Debt Total assets $ Debt $ Equity Number of shears @ $25

0% $40,000,000 $

b) Given the before-tax cost of debt at various levels of indebtedness, calculate the yearly interest expenses.

Table 13.10 Capital Structures Associated with Alternative Debt

Ratios for Cooke Company

Capital structure ($000)

Debt ratio Total assets Debt Equity Shares of common stock out-

[(2)*(2)] [(2)-(3)] standing (000) [(4)/$20]

(1) (2) (3) (4) (5)

0% $500 $0 $500 25.00

10 $500 50 450 22.50

20 500 100 400 20.00

30 500 150 350 17.50

40 500 200 300 15.50

50 500 250 250 12.50

60 500 300 200 10.00