Capital Structure - Cost Functions and Value

Number of
Cost of debt, common Required
Capital structure debt ratio rd stock shares return, rs
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%

Debt Ratio 0% 15% 30% 45%

Asset 10,000,000 10,000,000 10,000,000 10,000,000
Debt - 1,500,000 3,000,000 4,500,000
EBIT 2,000,000 2,000,000 2,000,000 2,000,000
Cost of debt, rd 0% 8% 9% 12%
Interest - 120,000 270,000 540,000
EBT 2,000,000 1,880,000 1,730,000 1,460,000
Tax rate 40% 40% 40% 40%
Tax 800,000 752,000 692,000 584,000
NOPAT 1,200,000 1,128,000 1,038,000 876,000
Prefered dividen 200,000 200,000 200,000 200,000
EAC (Earning Availble for Common) 1,000,000 928,000 838,000 676,000
# share 200,000 170,000 140,000 110,000
EPS 5.00 5.46 5.99 6.15
Rs 12% 13% 14% 16%
Po (value) 41.67 41.99 42.76 38.41
 60%
10,000,000
6,000,000
2,000,000
15%
900,000
1,100,000
40%
440,000
660,000
200,000
460,000
80,000
5.75
20%
28.75