43 Best Buy Supermarkets Ltd has total assets of $800 000. The current capital structure comprises 50% debt and 50% equity.

The annual interest cost of debt is 12%, and there are 500 000 shares on issue. Operating income (earnings before interest and taxes) is $100 000 and the firm’s tax rate is 30%.

a Calculate Best Buy’s profit after taxes and earnings per share (EPS).

b Calculate Best Buy’s profit after taxes and EPS, assuming a capital structure of 40% debt and 60% equity. Assume that there are now 600 000 shares on issue.

c Calculate Best Buy’s profit after taxes and EPS, assuming a capital structure of 60% debt and 40% equity. Assume that there are now 400 000 shares on issue.

d Which capital structure will give the best return to shareholders?