Tiffanys fourth concern: Returning to the base case, use the data in exhibits 18.1 and 18.2 to calculate and interpret the times interest earned and the cash and marketable securities to annual interest expense at the optimal capital structure for RN Temps. Please show your calculations.

Exhibit 18.1

Amount Borrowed	Cost of Debt	Cost of Equity
0	-	15%
2,500,000	10	15.5
5,000,000	11	16.5
7,500,000	13	18
10,000,000	16	20
12,500,000	20	25

Exhibit 18.2

Percentile	Debt Ratio	Debt Rating
10th	10%	AAA
25th	25	AA
40th	35	A
Median	50	BBB
60th	65	BB
75th	75	B
90th	82	C

1. Tiffanys first concern: What is the potential impact of increasing amounts of debt financing on the ROE and risk of RN Temps?

2. Tiffanys second concern:

a. What is the potential impact of increasing amounts of debt financing on the firms stock price and CCC. Graph the stock price and CCC at different levels of debt and interpret the relationships among them.

b. Based on your results so far, what is the optimal capital structure?

3. Tiffanys third concern: a. What are some potential changes that might affect the business risk of RN Temps?

5. Tiffany also wants to know the value of the firm at $7,500,000 of debt according to the Modigliani-Miller with corporate taxes model and the Miller model.

6. Considering all the information available in this case, what is your best estimate for the optimal (target) capital structure of RN Temps?

7. In your opinion, what are three key learning points from this case?