Medallion Cooling Systems, Inc., has total assets of $9,400,000, EBIT of $2,020,

Question

Medallion Cooling Systems, Inc., has total assets of $9,400,000, EBIT of $2,020,000, and preferred dividends of $200,000 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: Calculate earnings per share for each level of indebtedness. Use the equation P_0 = EPS/r_s and the earnings per share calculated in part (a) to calculate a price per share for each level of

Explanation / Answer

Answers:

LEVEL OF DEBT (%) 0 15 30 45 60 a) EPS ($) 5.06 5.54 6.04 6.70 6.31 b) Price of share 42.52 43.26 43.42 41.35 31.09

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