Optimal debt level
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** Please see the attached file for the complete problem description **
Debt level*
$200,000
$500,000
Cost of debt
10%
13%
Cost of equity
16%
18%
EBIT
$150,000
$150,000
Interest Expenses
$20,000
$
EBT
$130,000
$
Taxes (40%)
$52,000
$
EAT
$78,000
$
Value of equity
$487,500
Value of debt
$
$500,000
Value of the Burtronics
Stock price
Shares outstanding
10,000
* The difference of $300,000 in debt will be used to repurchase shares.
Burtronics Inc. is in the process of determining its optimal level of debt. Burtronics is a zero growth firm with all of its net income paid in dividend. Complete the following table, and recommend the optimal debt level for Burtronics.
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This solution explains how to determine the optimal debt level.
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** Please see the attached file for the complete solution response **
Debt level* $200,000 $500,000
Cost of debt 10% 13%
Cost of equity 16% 18%
EBIT $150,000 $150,000
Interest Expenses $20,000 $65,000 Debt X interest ...
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