Optimal capital structure Hawaiian Macadamia Nut Company has collected the data in the following

QUESTION

Optimal capital structure Hawaiian Macadamia Nut Company has collected the data in the following table with respect to its capital structure, expected earnings per share, and required return.Capital structureExpected earningsRequireddebt ratioper sharereturn, rs0%$3.1213%103.9015204.8016305.4417405.5119505.0020604.4022a. Compute the estimated share value associated with each of the capital structures, using the simplified method described in this chapter (see Equation 13.12).b. Determine the optimal capital structure on the basis of (1) maximization of expected earnings per share and (2) maximization of share value.c. Which capital structure do you recommend? Why?
Answer A Capital structure Expected earnings Required Estimated Share Value debt ratio per share return, rs (Earnings per share/Required return) 0% $ 3.12 13% $ 24.00 10 $ 3.90 15% $ 26.00 20 $ 4.80 16% $ 30.00 30 $ 5.44 17% $ 32.00 40 $ 5.51 19% $ 29.00 50 $ 5.00 20% $ 25.00 60 $ 4.40 22% $ 20.00 Answer B 1. Maxmization of expected Earnings per share 40% debt

, EPS $ 5.51 per share 2.Maxmization of share value 30% debt ratio, share value $ 32.00 Answer C Recommend 30% debt ratio, because it results in the maximum share value and is therefore consistent with the firms goal of owner wealth maximization

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