Question 3.

Annamz Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Annamz is thinking of leveraging the firm by selling $600,000 of debt financing. The cost of debt is 8% annually, and the current corporate tax rate for Annamz is 30%.

What is the break-even EBIT for Annamz with these two possible capital structures?

(4 Marks)

Question 4.

Shell Inc. is having a stock split. The current price is $57 per share, and you own 500 shares. The split is a one-and-one-half-shares-for-one share split.

a)What is the expected per share price after the split?

b)What is your wealth before and after the split?

c)Based on empirical evidence, does the market value of outstanding shares (new price times new quantity) tend to increase or decrease on average when stocks split into a greater number (but lower priced) shares, as in this case?