Question: ABC ltd is currently operating with 100% equity in their capital structure which it uses to finance its assets with a book value of ksh4,000m.

ABC ltd is currently operating with 100% equity in their capital structure which it uses to finance its assets with a book value of ksh4,000m. The equity has a share price of ksh20 per share. The companys EBIT is projected to be ksh150m; ksh350m and ksh650m under three possible economic situations of Poor; Fair and Good respectively.

Theres a proposal to release 30% of its equity capital using proceeds from a debt issued with an interest coupon of 8%.

Required:

Perform an analysis to show the effect of debt on the ROE and the EPS under the three economic conditions

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