The overall required return on investment

Reference no: EM13729561

Problem 2: Smith & James , has total assets of $20,000,000, EBIT of $2,000,000, preferred dividends of $250,000 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:
Cost of
debt, kd
No. of common stock shares Required
return, ks
0.00% 200000 10.00%
10.00% 170000 11.00%
9.00% 150000 12.00%
13.00% 110000 14.00%
11.50% 80000 13.00%
a. Calculate earnings per share for each level of indebtedness.
Use this grid for your answer.
Debt Ratio 0.00% 15.00% 30.00% 45.00% 60.00%
EBIT
Less Interest
EBT
Taxes at 40%
Net Profit
Less Preferred Div
Profits available to
common stockholders
Number of Shares
EPS
b. Calculate the price per share for each level of indebtedness
c. Choose the best capital structure. Why?

Reference no: EM13729561

Questions Cloud

Process of collecting and analyzing data : You were asked to present a special collection of data. Now that you are familiar with the process of collecting and analyzing data, do the following:

Calculate the cost of preference capital (kp) : Price = $15 and a Preference dividend of $1.9 paid every six months. Your answer should the effective annual cost as a decimal accurate to four decimal places. For example an answer of 12.113% should be entered as .1211 with no % sign.

What is the best way for a company to maintain : What is the best way for a company to maintain its competitive edge and contribute to overall good or happiness in relation to its workers and customers

Implement a more flexible financing policy : Tri-City Grocers is a chain of grocery stores that just hired a new CFO. Which of the following actions would you expect this CFO to adopt given her statement that she wants to implement a more flexible financing policy for the firm?

The overall required return on investment : Problem 2: Smith & James , has total assets of $20,000,000, EBIT of $2,000,000, preferred dividends of $250,000 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, t..

What is the delta of a one-year call option on ragwort stock : Over the coming year Ragwort’s stock price will halve to $50 from its current level of $100 or it will rise to $200. The one-year interest rate is 10%. What is the delta of a one-year call option on Ragwort stock with an exercise price of $100?

Riordan manufacturing virtual organization : Riordan Manufacturing has decided to make a change to company's customer management system. The company does not currently have any formal system for managing their customer information and has traditionally left this up to individual employees.

Present and future values and expected returns : Critically reflect on the importance of present and future values. What factors must be considered when calculating present and future values? What other qualitative factors play into present and future value decisions? Perhaps you have opportunities..

Compare and contrast these two depictions of women : Compare and contrast these two depictions of women, and comment on any general tendencies that you detect among artists of that era in this respect.

User Account

All Pages