Question
The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $39,900,000. It has earnings before
The board of directors of Morales Publishing, Inc., has commissioned a capital structure study. The company has total assets of $39,900,000. It has earnings before interest and taxes of $8,030,000 and is taxed at a rate of 40%. (please show work)
Create a spreadsheet showing values of debt and equity as well as the total number of shares, assuming a book value of $25 per share.
%debt | Asset total | Debt | Equity | No of Shares |
0% | $39,900,000 | |||
10 | $39,900,000 | |||
20 | $39,900,000 | |||
30 | $39,900,000 | |||
40 | $39,900,000 | |||
50 | $39,900,000 | |||
60 | $39,900,000 |
Given the before-tax cost of debt at various levels of indebtedness, calculate the yearly interest expenses.
Using EBIT of $8,030,000, a 40% tax rate, and the information developed in parts a and b, calculate the most likely earnings per share for the firm at various levels of indebtedness. Mark the level of indebtedness that maximizes EPS.
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