Solution Library

Scenario Analysis: Capital Restructuring of Nelson Corporation


Nelson Corporation has made the following forecast of sales, with the associated probabilities of occurrence noted.

    Sales           Probability
   $200,000          0.20
   300,000            0.60
   400,000            0.20

The company has fixed operating costs of $100,000 per year, and variable operating costs represent 40% of sales. The existing capital structure consists of 25,000 shares of common stock that have a $10 per share book value. No other capital items are outstanding. The marketplace has assigned the following required returns to risky earnings per share.

Coefficient of Estimated required               Variation of EPS return, rs
0.43                                                            15%
0.47                                                            16
0.51                                                            17
0.56                                                            18
0.60                                                            22
0.64                                                            24

The company is contemplating shifting its capital structure by substituting debt in the capital structure for common stock. The three different debt ratios under consideration are shown in the following table, along with an estimate, for each ratio, of the corresponding required interest rate on all debt.

 Debt ratio           Interest rate on all debt
    20%                      10%
    40                         12
    60                         14

The tax rate is 40%. The market value of the equity for a leveraged firm can be found by using the simplified method (see Equation 13.12).
a. Calculate the expected earnings per share (EPS), the standard deviation of EPS, and the coefficient of variation of EPS for the three proposed capital structures.
b. Determine the optimal capital structure, assuming (1) maximization of earnings per share and (2) maximization of share value.
c. Construct a graph (similar to Figure 13.7) showing the relationships in part b. (Note: You will probably have to sketch the lines, because you have only three data points.)


The question is about restructuring capital of a company. Nelson Corporation is contemplating on changing its capital structure to add in more debt to the capital. The interest rates for debt have been given along with the income tax rate. The calculation of selecting the best debt option has been given in the solution in detail.

Total Word Count NA


Download Full Solution


  • HWA

    this is a very good website

  • HWA

    I have 50 questions for the same test your page is showing only 28

  • HWA

    hi can you please help or guide me to answer my assignments. thanks

  • HWA

    hi can anyone help or guide me to my assignments. thanks

  • HWA

  • HWA

    This solution is perfect ...thanks

  • HWA

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA

    Perfect bank of solution. 

  • HWA

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA

    works fine.