Integrative—Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $9,700,000, EBIT of $2,03
Posted: Tue Jan 18, 2022 12:57 pm
Integrative—Optimal capital structure Medallion
Cooling Systems, Inc., has total assets of $9,700,000, EBIT
of $2,030,000, and preferred dividends of $201,000 and is taxed at
a rate of
40%. In an effort to determine the optimal
capital structure, the firm has assembled data on the cost
of debt, the number of shares of common stock for various
levels of indebtedness, and the overall required return
on investment:
Capital structure
debt ratio
Cost of debt, rd
Number of common
stock shares
Required return, rs
0%
0%
201,000
12.1%
15
8.3
171,000
13.1
30
8.7
142,000
13.8
45
11.8
105,000
16.3
60
14.8
79,000
20.1
a. Calculate earnings per share for each level of
indebtedness.
b. Use the equation
P0=EPS/rs and the earnings per share
calculated in part (a) to calculate a price per share for each
level of indebtedness.
c. Choose the optimal capital structure. Justify your
choice.
Cooling Systems, Inc., has total assets of $9,700,000, EBIT
of $2,030,000, and preferred dividends of $201,000 and is taxed at
a rate of
40%. In an effort to determine the optimal
capital structure, the firm has assembled data on the cost
of debt, the number of shares of common stock for various
levels of indebtedness, and the overall required return
on investment:
Capital structure
debt ratio
Cost of debt, rd
Number of common
stock shares
Required return, rs
0%
0%
201,000
12.1%
15
8.3
171,000
13.1
30
8.7
142,000
13.8
45
11.8
105,000
16.3
60
14.8
79,000
20.1
a. Calculate earnings per share for each level of
indebtedness.
b. Use the equation
P0=EPS/rs and the earnings per share
calculated in part (a) to calculate a price per share for each
level of indebtedness.
c. Choose the optimal capital structure. Justify your
choice.