The All-Star Production Corporation (APC) is considering a recapitalization plan that would convert APC from its current all-equity capital structure to one including some financial leverage. APC now has 10,000,000 shares of common stock outstanding, which are selling for $40.00 each, and you expect the firm’s EBIT to be $50,000,000 per year for the foreseeable future. The recapitalization proposal is to issue $100,000,000 worth of long-term debt at an interest rate of 6.50 percent and use the proceeds to repurchase as many shares as possible at a price of $40.00 per share. Assume there are no market frictions such as corporate or personal income taxes. Calculate the expected return on equity for DIC shareholders under both the current all-equity capital structure and under the recapitalization plan.

a. Calculate the number of shares outstanding, the per-share price and the debt-to-equity ratio for APC if the proposed recapitalization is adopted.

b. Calculate the earnings per share (EPS) and return on equity for APC shareholders under both the current all-equity capitalization and the proposed mixed debt/equity capital structure.

c. Calculate the break-even level of EBIT where earnings per share for APC stockholders are the same under the current and proposed capital structures.

d. At what level of EBIT will APC shareholders earn zero EPS under the current and the proposed capital structures?