- 20 Marks
BF – Nov 2015 – L1 – SB – Q2 – Basics of Business Finance and Financial Markets
Analyzing capital structure to compute estimated share values and recommend optimal structure.
Question
A firm has recently collected the following data in respect of its capital structure, expected earnings per share, and required rate of return.
| Debt Ratio % | Expected Earnings Per Share (N) | Required Rate of Return (%) |
|---|---|---|
| 0 | 3.10 | 14 |
| 10 | 3.80 | 16 |
| 20 | 4.60 | 17 |
| 30 | 5.25 | 19 |
| 40 | 5.70 | 20 |
| 50 | 5.00 | 22 |
| 60 | 4.50 | 24 |
You are required to:
a. Compute the estimated share values. (10 Marks)
b. Determine the optimal capital structure based on the maximization of expected earnings per share and the maximization of share values. (5 Marks)
c. Which capital structure criterion would you recommend and why? (5 Marks)
(Total: 20 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Earnings Per Share, Share Value
- Level: Level 1
- Topic: Basics of Business Finance and Financial Markets
- Series: NOV 2015
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