Question: Let's compare the payoffs of two different capital structures for the same firm. One is unlevered; and the other is levered and has $8,000 in

Let's compare the payoffs of two different capital structures for the same firm.

One is unlevered; and the other is levered and has $8,000 in debt with 8% interest. The corporate tax rate is assumed to be 35%. The unlevered firm has 400 shares. The price per share of the unlevered firm is $32.50. The return on equity for the unlevered firm is 10%.

(a) What should the price per share be of the levered firm and how many shares does the levered firm have outstanding? (10 points)

(b) At what value of EBIT, would the EPS [earnings per share] be the same for the unlevered and levered firm?

(10 points)

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