Leverage and Capital Structure:
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?