Straightforward Theatre Company has an EBIT of $1 million per year. The WACC of the firm is

Question:

Straightforward Theatre Company has an EBIT of $1 million per year. The WACC of the firm is 10 percent and the before-tax cost of debt is 4 percent. The debt is risk free and all cash flows are perpetual. The current D/E ratio is 2/3. The corporate tax rate is 20 percent. The new CEO of Straightforward believes that the D/E ratio is too high and would like to reduce it to 1/3.

She will issue stock to repay the debt.

a. What is the impact on the EPS of Straightforward Theatre with this change in the D/E ratio?

b. What is the impact on the cost of equity for Straightforward Theatre?

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...