The board of directors of Mona Publishing, Inc., has commissioned a capital structure study. The company has total assets of US$40,000,000. It has earnings before interest and taxes of US$8,000,000 and is taxed at a rate of 40 percent. a. Create a spreadsheet like the one in Table 12.10 showing values of debt and equity as well as the total number of shares, assuming a book value of US$25 per share.

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

c. Using EBIT of US$8,000,000, a 40 percent 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.

d. Using the EPS developed in part c, the estimates of required return, rs, and Equation 12.12, estimate the value per share at various levels of indebtedness. Mark the level of indebtedness in the following table that results in the maximum price per share, P0.

e. Prepare a recommendation to the board of directors of Mona Publishing that specifies the degree of indebtedness that will accomplish the firm's goal of optimizing share- holder wealth. Use your findings in parts a through d to justify your recommendation.

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%Debt Total assets USS Debt USS Equity No. 0f shares @ USS25 096 10 20 30 40 50 60 US$40,000,000 US$-- USS 40,000,000 40,000,000_ 40,000,000 40,000,000_ 40,000,000 40,000,000 Before-tax cost of debt, rd % Debt USS Total debt USS Interest expense 0% 10 20 30 40 50 60 USS 0.0% USS 7.5 8.0 9.0 11.0 12.5 15.5 No. of shares Interest % Debt EBIT expense EBT Net income EPS laxes 0% 10 20 30 40 50 60 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 Debt EPS Po 0% 10 20 30 40 50 60 10.0% 10.3 10.9 11.4 _12.6 ー 14.8 17.5