Evaluating Tampa Manufacturings Capital Structure Tampa Manufacturing, an established producer of printing equipment, expects its sales to remain

flat for the next 3 to 5 years because of both a weak economic outlook and an expectation of little new printing technology development over that period. On the basis of this scenario, the firms board has instructed its management to institute programs that will allow it to operate more efficiently, earn higher profits, and, most important, maximize share value. In this regard, the firms chief financial officer (CFO), Jon Lawson, has been charged with evaluating the firms capital structure. Lawson believes that the current capital structure, which contains 10% debt and 90% equity, may lack adequate financial leverage. To evaluate the firms capital structure, Lawson has gathered the data summarized in the following table on the current capital structure (10% debt ratio) and two alternative capital structuresA (30% debt ratio) and B (50% debt ratio)that he would like to consider. Lawson expects the firms earnings before interest and taxes (EBIT) to remain at its current level of $1,200,000. The firm has a 40% tax rate. Current level of total financing of the firm is $10,000,000.
C apital S tructure C urre nt S ourceof C apital L ongte de rm bt C oupon inte st rate re N of com on stock o. m R quire re e d turn on e quity C orporatetaxrate R q ire e ts e u mn : a. C alculateE for tw le e of E IT($600 PS o v ls B ,000 and $1,200,000) for e ach of thecapital structure s. b. E stim thede re of financial le e e(D ) for e ate g e v rag FL ach of thealte rnativ capital structure e s? c. G raph thethre capital structure on thesam se of E IT PSax on a g e s e t B -E is raph pape (attach prope ). r rly d. Me ntion w hich capital structureis pre rre at diffe nt le e of e pe d E IT fe d re v ls x cte B . eE . stim thev ate alueof theshare of this com s panyunde e r ach capital structure . 36.00% 10%de bt $1,000,000 8.20% 10 0000 12% A 30%de bt $3 ,000,000 8.61% 70000 13% B 50%de bt $5,000 ,000 9.21% 40000 18%

Nm a e ID

Md. R -U a eza l-H bib 11926 1011

S c io et n c