Suppose that the firm in question #1 plans to increase the proportion of debt as part of its capital structure. The projected EPS would then be $2.50. In a world with no financial distress, determine what the stock price should be and explain why in the real world the stock price would be less than that amount.

Financing and Capital Structure.

Upon completion of the Required Readings, write a thorough, well-planned narrative answer to the following discussion question.  Rely on your Required Readings and the Lecture and Research Update for specific information to answer the discussion question, but turn to your original thoughts when asked to apply, evaluate, analyze, or synthesize the information.  Your Discussion Question response should be both grammatically and mechanically correct, and formatted in the same fashion as the question itself.  If there is a Part A, your response should identify a Part A, etc.  In addition, you must appropriately cite all resources used in your responses and document in a bibliography using APA style.

Respond to the following:

1. Assume that a firm’s earnings per share (EPS) are expected to be $2.00 next year and that analysts have determined that an appropriate forward-looking multiple is 15 times the projected earnings. What should the stock price be?

2. Suppose that the firm in question #1 plans to increase the proportion of debt as part of its capital structure. The projected EPS would then be $2.50. In a world with no financial distress, determine what the stock price should be and explain why in the real world the stock price would be less than that amount.