Question No: 06 a. Critically examine traditional theory of capital structure? Do you agree that optimum capital structure exists and is achievable? b. Management of Total S.E. Inc. is considering two alternative financing plans. The detailed information is given in the table below. Amount in $’000 Plan A Plan B Common stock 10000 6000 Preferred stock 4000 2000 Borrowings 6000 12000 The par value of common stock is $10, preferred stock has $100 par value and 6% dividend, and long-term debt is presented by 10- year bonds of $1,000 par value and a fixed annual coupon rate of 8%. The corporate income tax rate is 30%. If the company expects to earn EBIT of 3000 ( amount in $000), which of two plans will produce better EPS and thus higher shareholders’ value?
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