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Burtronics Inc. is in the process of determining its optimal level of debt. Burtronics is...

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Accounting

Burtronics Inc. is in the process of determining its optimal level of debt. Burtronics is a zero growth firm with all of its net income paid in dividend. Complete the following table, and recommend the optimal debt level for Burtronics. Make sure to show all your work, restrict your answers to the alternatives given, and justify your answer.

Debt level*

$400,000

$700,000

Cost of debt

9%

12%

Cost of equity

12%

15%

EBIT

$200,000

$200,000

Interest Expenses

$36,000

$

EBT

$164,000

$

Taxes (40%)

$65,600

$

EAT

$98,400

$

Value of equity

$820,000

Value of debt

$

$700,000

Value of the Burtronics

Stock price

Shares outstanding

16,000

* The difference of $300,000 in debt will be used to repurchase shares.

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