Leverage and capital structure PLEASE SHOW ALL WORK EPS is the dollars and INVES

Question

Leverage and capital structure   PLEASE SHOW ALL WORK    EPS is the dollars and INVESTOR IS %'S they got jumbled

capital structure debt ratio:  0% ,10, 20, 30, 40, 50, 60

EARNINGS PER SHARE  $6.24, 7.80, 9.60,10.88, 11.02, 10.00, 8.80  

Investor required return rate  13%,15,16,17,19,20,22

a) Using the capitalized earnings method (EPS/RS), compute the estimated share values associated with each of the capital structures.       

B) Select the optimal capital structure on the basis of:   a. Maximization of expected earnings per share.

                                                                                        b. Maximization of share value

c) Which capital structure do you recommend ? And why????                            

Explanation / Answer

Answer for Question a:

Estimated Share values are as under:

Answer for Question b:

Optimal capital structure on the basis of maximization of expected earnings per share is maximum when the capital debt ratio is 40%, at this structure EPS is 11.02.

Optimal capital structure on the basis of Maximization of share value is 0% debt at this capital structure share value is $48.00

Answer for Question c:

Capital structure recommeded is the one, where the EPS per share is more i.e., when capital structure to debt ratio is 40%.

This strcuture is recommed because the Earnings per share is more when compared to other alternative structures as the company is able to take advantage of leverage.

Capital structure debt ratio Earnings per share Investor required return rate Estimated share value 0 $6.24 13.00% $48.00 10 $7.80 15.00% $41.60 20 $9.60 16.00% $39.00 30 $10.88 17.00% $36.71 40 $11.02 19.00% $32.84 50 $10.00 20.00% $31.20 60 $8.80 22.00% $28.36

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