Scenario: You are an analyst and have been assigned with the task of finding the optimal capital...

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Scenario: You are an analyst and have been assigned with the task of finding the optimal capital structure for your firm. Currently the firm is all equity, but the owner would like to cash out some equity and increase the amount of debt to a "safe" level. Thus, the shares will be repurchased by the majority stock holder at the price listed in the spreadsheet. The company is privately held so there will be no fluctuation in the stock price based on supply and demand.Please open and download the following spreadsheet,Target Capital Structure Student.xlsdownload.You are required to recommend the number of shares that will optimize the value of the firm.Please use the following spreadsheet for additional information and to show your analysis.Submit your document to this drop box.

Shakeel · Accepted Answer

Sheet1
	Repurchasing Shares to Change Capital Structure
	This is an example of a firm with 100% equity, A = E.  Firm currently has 100,000 shares of
	common stock outstanding, with a price of $20.  The EBIT for the firm will be $500,000.  The
	marginal tax rate for the firm is 40%.  All earnings are paid out in the form of dividends.
	Therefore, there is no growth for the firm and the stock price is determined by DPS/ks.
	The firm must borrow in increments of $250,000, with a maximum debt level of $1,000,000.
	The increases to the cost of debt and the cost of equity increases with debt is as follows:
				Amount Borrowed	kd	ks
				$   - 0	-	15.0%
				$   250,000	10.0%	15.5%
				$   500,000	11.0%	16.5%
				$   750,000	13.0%	18.0%
				$   1,000,000	16.

Scenario : You are an analyst and have been assigned with the task of finding the optimal capital structure for your firm. Currently the firm is all equity, but the owner would like to cash out some...

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