10. EPS and optimal debt ratio and the standard deviation of the earnings per sh

Question

10. EPS and optimal debt ratio and the standard deviation of the earnings per share as shown in the following table. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Williams Glassware has estimated, at various debt ratios, the expected earnings per share Debt ratioEarnings per share (EPS) 0% 20 40 60 80 2.97 3.53 3.97 3.84 Standard deviation of EPS $1.14 1.81 2.78 3.99 5.51 a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio debt ratio, with (2) per share earnings. (Select from Maximum EPS appears to be at (1) the drop-down menus.) b, The coefficient of variation for a debt ratio of 0% is The coefficient of variation for a debt ratio of 20% is The coefficient of variation for a debt ratio of 40% is The coefficient of variation for a debt ratio of 60% is The coefficient of variation for a debt ratio of 80% is Which of the two graphs below correctly depicts the debt ratio vs. the coefficient of variation? The correct graph is (3) . (Round to two decimal places.) . (Round to two decimal places.) . (Round to two decimal places.) . (Round to two decimal places.) . (Round to two decimal places.) . (Select from the drop-down menu.)

Explanation / Answer

Maximum EPS occurs at Debt ratio of 60% with $3.97 per share earnings

Coefficient of Variation,CV=Standard Deviaiton/Mean

Debt ratio 0%:CV=1.14/2.25=0.50667
Debt ratio 20%:CV=1.81/2.97=0.609428
Debt ratio 40%:CV=2.78/3.53=0.787535
Debt ratio 60%:CV=3.99/3.97=1.005038
Debt ratio 80%:CV=5.51/3.84=1.434896

Business risk is coefficient of variation Hence Graph2 is correct

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