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Capital Structure Case Study - Q

The document provides information and calculations for Cosmetic Manufacturers to analyze different capital structure options with varying levels of debt from 0% to 60% of total assets. It includes tables to calculate total debt, interest expense, earnings per share, and estimated share price for each debt ratio. The purpose is to help the company determine the optimal debt ratio to adopt based on maximizing shareholder value.

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rosario correia
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553 views

Capital Structure Case Study - Q

The document provides information and calculations for Cosmetic Manufacturers to analyze different capital structure options with varying levels of debt from 0% to 60% of total assets. It includes tables to calculate total debt, interest expense, earnings per share, and estimated share price for each debt ratio. The purpose is to help the company determine the optimal debt ratio to adopt based on maximizing shareholder value.

Uploaded by

rosario correia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FINC1901 Corporate Finance

Tutorial 8_Capital Structure Exercise

Cosmetic Manufacturers is contemplating changing the capital structure of the firm.


The firm has $45 million in total assets, earnings before interest and taxes of $7.5
million and is taxed at a rate of 40%.
Complete the following tables showing:
a. The level of debt, equity and number of shares of common stock. The
nominal value is $20 per share
% Number of shares @
Total assets Debt ($) Equity ($)
Debt $20
$45,000,00
0%
0
$45,000,00
30%
0
$45,000,00
40%
0
$45,000,00
50%
0
$45,000,00
60%
0

b. The total debt and interest expense for each level of leverage
Note: the cost of debt before taxes (r d ¿ for each level of leverage is given
%
Total debt ($) Before-tax cost of debt, rd Interest expense ($)
Debt
0% 0.0%
30% 9.5%
40% 11.0%
50% 12.5%
60% 15.5%
c. The earnings per share (EPS) for each level of leverage
% Interest Net Number EP
EBIT EBT Taxes
Debt expense income of shares S
$7,500,00
0%
0
$7,500,00
30%
0
$7,500,00
40%
0
$7,500,00
50%
0
$7,500,00
60%
0
d. The estimates of the company share price for each level of leverage.
Note: the required rate of return (r s ¿ for each level of leverage is
given
%
EPS rs P0
Debt
0% 10.0%
30% 11.4%
FINC1901 Corporate Finance
Tutorial 8_Capital Structure Exercise

40% 12.6%
50% 14.8%
60% 17.5%

e. Based on your answers to the previous parts, which debt ratio would
you recommend to the company? Explain your answer.

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