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    EPS and capital structure

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    Calculation of Share Value
    Estimates Associated with
    Alternative capital Structures

    Capital Structure Expected Estimated Estimated
    Debt Ratio EPS Required Return Share Value
    0% $1.75 11.40%
    10 1.90 11.80%
    20 2.25 12.50%
    30 2.55 13.25%
    40 3.18 18.00%
    50 3.06 19.00%
    60 3.10 25.00%

    Given the above estimates of EPS and required rates of return based on increasing levels of debt for this organization, calculate the estimated share price value for each level.
    Assuming the organization makes decisions considering how best to maximize shareholder wealth, at what debt ratio will this objective be realized?

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    Solution Summary

    The solution explains how to determine the best capital structure for shareholder wealth maximization