Problem: Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the attached table.
a) Estimate the optimal debt ratio on the basis of the relationship bewtween earnings per share and debt ratio. You will probably find it helpful to graph the relationship.
b) Graph the relationship between coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.
| Debt Ratio |
Earnings Per Share (EPS) |
Standard Deviation of EPS |
| 0% |
$2.30 |
$1.15 |
| 20 |
3.00 |
1.80 |
| 40 |
3.50 |
2.80 |
| 60 |
3.95 |
3.95 |
| 80 |
3.80 |
5.53 |