Question
1. (20 POINTS) Alpha Company is looking at two different capital structures, one an all-equity firm and the other a leveraged firm with $2 million
1. (20 POINTS) Alpha Company is looking at two different capital structures, one an all-equity firm and the other a leveraged firm with $2 million of debt financing at 8% interest. The all-equity firm will have a value of $4 million with 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding. Assume there are no taxes.
a. What is the EPS for the unlevered and levered capital structures assuming operating income is $240,000?
b. What is the EPS for the unlevered and levered capital structures assuming operating income is $400,000?
c. At what operating income would Alpha Company be indifferent between the two capital structures?
d. Create a graph with operating income on the horizontal axis and EPS on the vertical axis. Show on the graph how EPS varies with operating income for the two capital structures.
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