Integrative: Optimal capital structure The board of directors of Morales Publish
ID: 2768728 • Letter: I
Question
Explanation / Answer
1
Spread sheet showing debt and Equity:
% Debt
Total Assets
$ Debt
$ Equity
Number of Shares @ $25
A
B
C = A*B
D = B-C
D/$25
0%
$ 40,000,000
$ -
$ 40,000,000
1,600,000
10%
$ 40,000,000
$ 4,000,000
$ 36,000,000
1,440,000
20%
$ 40,000,000
$ 8,000,000
$ 32,000,000
1,280,000
30%
$ 40,000,000
$ 12,000,000
$ 28,000,000
1,120,000
40%
$ 40,000,000
$ 16,000,000
$ 24,000,000
960,000
50%
$ 40,000,000
$ 20,000,000
$ 20,000,000
800,000
60%
$ 40,000,000
$ 24,000,000
$ 16,000,000
640,000
2
Calculation of Yearly interest expense:
% Debt
$ Total Debt
Before tax Cost of Debt, rd
$ Interest Expense
A
B
C
B*C
0%
$ -
0.0%
$ -
10%
$ 4,000,000
7.5%
$ 300,000
20%
$ 8,000,000
8.0%
$ 640,000
30%
$ 12,000,000
9.0%
$ 1,080,000
40%
$ 16,000,000
11.0%
$ 1,760,000
50%
$ 20,000,000
12.5%
$ 2,500,000
60%
$ 24,000,000
15.5%
$ 3,720,000
3
Calculation of EPS:
% Debt
EBIT
$ Interest Expense
EBT
Taxes
Net income
Number of Shares
EPS
A
B
C
D = B-C
E = D*40%
F = D-E
G
F/G
0%
$ 8,000,000
$ -
$ 8,000,000
$ 3,200,000
$ 4,800,000
1,600,000
$ 3.00
10%
$ 8,000,000
$ 300,000
$ 7,700,000
$ 3,080,000
$ 4,620,000
1,440,000
$ 3.21
20%
$ 8,000,000
$ 640,000
$ 7,360,000
$ 2,944,000
$ 4,416,000
1,280,000
$ 3.45
30%
$ 8,000,000
$ 1,080,000
$ 6,920,000
$ 2,768,000
$ 4,152,000
1,120,000
$ 3.71
40%
$ 8,000,000
$ 1,760,000
$ 6,240,000
$ 2,496,000
$ 3,744,000
960,000
$ 3.90
50%
$ 8,000,000
$ 2,500,000
$ 5,500,000
$ 2,200,000
$ 3,300,000
800,000
$ 4.13
60%
$ 8,000,000
$ 3,720,000
$ 4,280,000
$ 1,712,000
$ 2,568,000
640,000
$ 4.01
EPS is maximum at Debt % of 50%
4
Calculation of Value per share:
% Debt
EPS
Required Rate
Price (P0)
A
B
C
B/C
0%
$ 3.00
10.0%
$ 30.00
10%
$ 3.21
10.3%
$ 31.15
20%
$ 3.45
10.9%
$ 31.65
30%
$ 3.71
11.4%
$ 32.52
40%
$ 3.90
12.6%
$ 30.95
50%
$ 4.13
14.8%
$ 27.87
60%
$ 4.01
17.5%
$ 22.93
Price is Maximum at 30 % Debt
1
Spread sheet showing debt and Equity:
% Debt
Total Assets
$ Debt
$ Equity
Number of Shares @ $25
A
B
C = A*B
D = B-C
D/$25
0%
$ 40,000,000
$ -
$ 40,000,000
1,600,000
10%
$ 40,000,000
$ 4,000,000
$ 36,000,000
1,440,000
20%
$ 40,000,000
$ 8,000,000
$ 32,000,000
1,280,000
30%
$ 40,000,000
$ 12,000,000
$ 28,000,000
1,120,000
40%
$ 40,000,000
$ 16,000,000
$ 24,000,000
960,000
50%
$ 40,000,000
$ 20,000,000
$ 20,000,000
800,000
60%
$ 40,000,000
$ 24,000,000
$ 16,000,000
640,000
2
Calculation of Yearly interest expense:
% Debt
$ Total Debt
Before tax Cost of Debt, rd
$ Interest Expense
A
B
C
B*C
0%
$ -
0.0%
$ -
10%
$ 4,000,000
7.5%
$ 300,000
20%
$ 8,000,000
8.0%
$ 640,000
30%
$ 12,000,000
9.0%
$ 1,080,000
40%
$ 16,000,000
11.0%
$ 1,760,000
50%
$ 20,000,000
12.5%
$ 2,500,000
60%
$ 24,000,000
15.5%
$ 3,720,000
3
Calculation of EPS:
% Debt
EBIT
$ Interest Expense
EBT
Taxes
Net income
Number of Shares
EPS
A
B
C
D = B-C
E = D*40%
F = D-E
G
F/G
0%
$ 8,000,000
$ -
$ 8,000,000
$ 3,200,000
$ 4,800,000
1,600,000
$ 3.00
10%
$ 8,000,000
$ 300,000
$ 7,700,000
$ 3,080,000
$ 4,620,000
1,440,000
$ 3.21
20%
$ 8,000,000
$ 640,000
$ 7,360,000
$ 2,944,000
$ 4,416,000
1,280,000
$ 3.45
30%
$ 8,000,000
$ 1,080,000
$ 6,920,000
$ 2,768,000
$ 4,152,000
1,120,000
$ 3.71
40%
$ 8,000,000
$ 1,760,000
$ 6,240,000
$ 2,496,000
$ 3,744,000
960,000
$ 3.90
50%
$ 8,000,000
$ 2,500,000
$ 5,500,000
$ 2,200,000
$ 3,300,000
800,000
$ 4.13
60%
$ 8,000,000
$ 3,720,000
$ 4,280,000
$ 1,712,000
$ 2,568,000
640,000
$ 4.01
EPS is maximum at Debt % of 50%
4
Calculation of Value per share:
% Debt
EPS
Required Rate
Price (P0)
A
B
C
B/C
0%
$ 3.00
10.0%
$ 30.00
10%
$ 3.21
10.3%
$ 31.15
20%
$ 3.45
10.9%
$ 31.65
30%
$ 3.71
11.4%
$ 32.52
40%
$ 3.90
12.6%
$ 30.95
50%
$ 4.13
14.8%
$ 27.87
60%
$ 4.01
17.5%
$ 22.93
Price is Maximum at 30 % Debt
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.