Question: Use the following information to answer the questions below. Current cap. structure Proposed cap. structure Assets $15 million $15 million Debt $0 $6 million Equity

Use the following information to answer the questions below.

	Current cap. structure	Proposed cap. structure
Assets	$15 million	$15 million
Debt	$0	$6 million
Equity	$15 million	$9 million
Share price	$25.00	$22.50
Shares outstanding	600,000	???
Bond coupon rate	N/A	8%

Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values.

1. How many shares are outstanding under the proposed capital structure?

2. What is the expected EPS under the current capital structure if there is a recession?

3. What is ROE for the proposed capital structure if the expected state occurs?

4. Write out the equation to find EBIT*, the breakeven EBIT for these two capital structures? Make sure in your equation EBIT* is the only unknown variable with all other numbers correctly specified.

Explain what the LHS and the RHS of your equation represent, respectively.

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Solution 1 Equity Market share price No of shares outstanding 9000 000 2250 400 000 Shares ... View full answer

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