Current cap. structure Proposed cap. structure

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Assets $15 million $15 million

Debt $0 $5 million

Equity $15 million $10 million

Share price $25.00 $20.00

Shares outstanding 600,000 ???

Bond coupon rate N/A 8%

Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values. Ignore taxes.

How many shares are outstanding under the proposed capital structure?

A. 600,000 shares

B. 500,000 shares

C. 400,000 shares

D. 300,000 shares

(Refer to the above information) What is the expected EPS under the current capital structure if there is a recession?

A. $6.25

B. $5.00

C. $4.17

D. $3.33