Question: Integrative—Optimal capital structure Medallion Cooling Systems, Inc., has

total assets of $10,000,000, EBIT of $2,000,000, 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:

Capital structure No. of common

debt ratio Cost of debt, kd stock shares Required return, ks

0% 0% 200,000 12%

15 8 170,000 13

30 9 140,000 14

45 12 110,000 16

60 15 80,000 20

1. Calculate earnings per share for each level of indebtedness.

c. Choose the optimal capital structure. Justify your choice.

Price: $2.99

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