# We can now estimate the value of Cooke Company’s stock under each of the alternative capital… 1 answer below »

We can now estimate the value of Cooke Company’s stock under each of the alternative capital structures. Substituting the expected EPS (column 1 of Table 12.13) and the required returns, ks (column 2 of Table 12.14), into Equation 12.12 for each of the capital structures, we obtain the share values given in column 3 of Table 12.15. Plotting the resulting share values against the associated debt ratios, as shown in Figure 12.7, clearly illustrates that the maximum share value occurs at the capital structure associated with a debt ratio of 30%.

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 TABLE 12.15 Calculation of Share ValueEstimates Associated withAlternative Capital Structuresfor Cooke Company Capital structuredebt ratio Expected EPS(from column 1of Table 12.13)(1) Estimatedrequired return, ks(from column 2of Table 12.14)(2) Estimatedshare value[(1) ÷ (2)](3) 0% \$2.40 0.115 \$20.87 10 2.55 0.117 21.79 20 2.72 0.121 22.48 30 2.91 0.125 23.28 40 3.12 0.14 22.29 50 3.18 0.165 19.27 60 3.03 0.19 15.95

 TABLE 12.14 Required Returns for CookeCompany’s AlternativeCapital Structures Capital structuredebt ratio Coefficient ofvariation of EPS(from column 3of Table 12.13)(1) Estimated requiredreturn, ks(2) 0% 0.71 11.50% 10 0.74 11.7 20 0.78 12.1 30 0.83 12.5 40 0.91 14 50 1.07 16.5 60 1.4 19

 TABLE 12.13 Expected EPS, Standard Deviation, andCoefficient of Variation for AlternativeCapital Structures for Cooke Company Capital structuredebt ratio Expected EPS(1) Standard deviationof EPS(2) Coefficient ofvariation of EPS[(2) x (1)](3) 0% \$2.40 \$1.70 0.71 10 2.55 1.88 0.74 20 2.72 2.13 0.78 30 2.91 2.42 0.83 40 3.12 2.83 0.91 50 3.18 3.39 1.07 60 3.03 4.24 1.4

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