Chapter 12: Problem 12-19. Various capital structures Charter Enterprises currently has $1 million in total assets and is totally equity-financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio’s value?
Chapter 12: P12-21 EPS and optimal debt ratio Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.
Debt Ratio 0%...... EPS $2.30….Standard deviation of EPS $1.15
Debt Ratio 20%.....EPS $3.00….Standard deviation of EPS $1.80
Debt Ratio 40% …EPS $3.50….Standard deviation of EPS $2.80
Debt Ratio 60%.... EPS $3.95….Standard deviation of EPS $3.95
Debt Ratio 80% …EPS $3.80….Standard deviation of EPS $5.53
a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.
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