Question: Lets 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?

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

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