The Hendricks corporation has total assets of $13 million. They have earnings before interest and taxes of $3,500,000 and preferred dividends of $325,000. Their tax rate is 40%. Hendricks wants to determine the optimal capital structure and have put together data on the cost of debt, the number of shares of common stock for different levels of indebtedness and the overall required return on investment.

Capital Structure Debt Ratio Cost of Debt No. of common stock shares Required Return

0% 0% 225,000 12%

15% 8% 182,000 11%

20% 10% 150,000 9%

40% 12% 132,000 10%

55% 15% 120,000 7%

What is the EPS for each of the debt structures? You should have five EPS amounts (15 points)

What is the stock values using the EPS amounts in part A? You should have five stock values amounts (15 points).

Based on part B, what is the optimal capital structure? Include the amounts for the debt and equity (5 points).