FIN 320 Week 4 Learning Team Assignment Cost of Capital Memo

Apr 24th, 2015
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FIN 320 Week 4 Learning Team Assignment Cost of Capital Memo

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Learning Team Assignment:Cost of Capital MemoFIN/320MemorandumTo: The President - McGraw IndustriesFrom: Ron Lewis - Chief Financial Officer (CFO)CC:Date: March 6, 2011Subject: Cost of CapitalThe following summarization and graph outlines the evaluation of the firm's current capital structure and two proposed alternatives for consideration.The current capital structure has the least amount of debt and the highest times interest earned ratio and is therefore the least risky. The capital structure alternative, A, with a 30% debt ratio has a lower times interest earned ratio than the current capital structure but nonetheless may be considered safe for a firm operating in this industry. The capital structure alternative, B, with a 50% debt ratio incurs the highest rate of interest and its times interest earned ratio is the lowest. This capital structure puts the firm at risk in fulfilling its interest obligations. Although debt financing has the tax shield advantage, the firm should avoid alternative B.According to the basis of the graph, the capital structure that will maximize McGraw's earning per share is at an expected level of $1, 2000,000 is plan B, EPS is at the highest with the 50% debt ratio. When looking at Plan B it will maximize the earning per share (EPS) to $3.54 compared to the business's current EPS of $11.15. But the earnings per share will be maximized with the capital structure, which may not be the option to take. There are dr

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