EBIT, Taxes, and Leverage $[$LO$2]$ Repeat parts $($a$)$ and $($b$)$ in Problem $1$ assuming

the company has a tax rate of $35$ percent.

ROE and Leverage $[$LO$1,2]$ Suppose the company in Problem $1$ has a market$-$to$-$

book ratio of $1\mathrm{.}0.$

a$.$ Calculate return on equity $($ROE$)$ under each of the three economic scenarios

before any debt is issued. Also calculate the percentage changes in ROE for

economic expansion and recession, assuming no taxes.

b$.$ Repeat part $($a$)$ assuming the firm goes through with the proposed recapitalization.

c$.$ Repeat parts $($a$)$ and $($b$)$ of this problem assuming the firm has a tax rate of

$35$ percent.

Break$-$Even EBIT $[$LO$1]$ DAR is comparing two different capital structures: an

all$-$equity plan $($Plan I$)$ and a levered plan $($Plan II$).$ Under Plan I, the company would

have $195,000$ shares of stock outstanding. Under Plan II$,$ there would be $140,000$

shares of stock outstanding and $$1,787,500$ in debt outstanding. The interest rate on

the debt is $8$ percent, and there are no taxes.

a$.$ If EBIT is $$400,000,$ which plan will result in the higher EPS?

b$.$ If EBIT is $$600,000,$ which plan will result in the higher EPS?

c$.$ What is the break$-$even EBIT?