It is Friday evening, May 18^th, 2021. Max Win is the Chief Financial Officer at Johnson&Johnson, a British publicly listed online pharmacy company. Johnson&Johnson is an all-equity financed firm with zero debt. As a financial advisor to Johnson&Johnson, you have a dinner reservation with Max Win at 7 pm at the Canary Wharf, London.

"I must take the recapitalisation plan seriously" says Max. "We are considering a recapitalisation plan that would convert Johnson&Johnson from its all-equity capital structure to one including substantial financial leverage" adds Max.

Johnson&Johnson is an unlevered firm operates in perfect markets and has net operating income (EBIT) of 1.50 million per year for the foreseeable future. Assume that the required rate of return on assets for firms in this industry is 8 per cent. The firm issues 6 million worth of debt, with a required rate of return of 5 per cent, and uses the proceeds to repurchase outstanding shares. There are no corporate or personal taxes. Max shares the following information with you so that you can evaluate the effect of financial leverage.

Table 1: Current and Proposed Capital Structure of PharmaTech

Figures in thousands Current (Unlevered = U] Proposed (Levered = L) Assets E15,000 E15,000 Equity E15,000 19,000 Debt EO E6,000 Debt-to-equity ratio 0 0.67 Shares outstanding 200 120.0 Share price E75.00 E75.00 Interest rate on debt 5.0%