Hello, I am stuck on this one. Will you please help? Pleaseshow as much work as possible so that I...

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Hello, I am stuck on this one. Will you please help? Pleaseshow as much work as possible so that I can really understand it.Thank you.

Here is the question containing 3 parts:

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, thefirm has assembled data on the cost of debt, the number of sharesof common stock for various
 levels of indebtedness, and the overallrequired return on investment:

Capital structure debt ratio

Cost of debt, kd

No. of common stock shares

Required return, ks

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 ofindebtedness.

2. Use Equation Po = EPS/ks and theearnings per share calculated in part a to calculate a price pershare for each level of indebtedness.

3. Choose the optimal capital structure. Justifyyour choice.

David · Accepted Answer

P12–21 Integrative—Optimal capital structure Medallion Cooling Systems, Inc
(a)
	Debt Ratio
	0%
	
	15%
	
	30%
	
	45%
	
	60%
	EBIT
	$2,000,000
	
	$2,000,000
	
	$2,000,000
	
	$2,000,000
	
	$2,000,000
	Less interest
	0
	
	120,000
	
	270,000
	
	540,000
	
	900,000
	EBT
	$2,000,000
	
	$1,880,000
	
	1,730,000
	
	$1,460,000
	
	$1,100,000
	Taxes @40%
	800,000
	
	752,000
	
	692,

Hello, I am stuck on this one. Will you please help? Pleaseshow as much work as possible so that I can really understand it.Thank you. Here is the question containing 3 parts: Medallion Cooling...

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