Integrative----Optimal capital structure???Theboard of directors of Morales? Publishing, Inc., has commissioned acapital structure study. The company has total assets of $39,500,000. It has earnings before interest and taxes of $7,900,000 and is taxed at a rate of 23%.
a. Create a spreadsheet showing values of debt and equity aswell as the total number of? shares, assuming a book value of?$25per share.
b. Given the? before-tax cost of debt at various levels of?indebtedness, calculate the yearly interest expenses.
c. Using EBIT of $ 7,900,000?, a 23% tax? rate, and theinformation developed in parts ?(a?) and ?(b?)?, calculate the mostlikely earnings per share for the firm at various levels ofindebtedness. Mark the level of indebtedness that maximizesEPS.
d. Using the EPS developed in part ?(c?)?, the estimates ofrequired? return, rs and the equation P0 = EPS / rs?, estimate thevalue per share at various levels of indebtedness. Mark the levelof indebtedness in the following table that results in the maximumprice per? share, P0.
e. Prepare a recommendation to the board of directors of MoralesPublishing that specifies the degree of indebtedness that willaccomplish the? firm's goal of optimizing shareholder wealth. Useyour findings in parts ?(a?) through ?(d?) to justify yourrecommendation.
