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1) Currently the firm has 1 million shares outstanding, each sells for $20, total worth of shares: $20 million. It has assets (buidings, equipment, patents

1) Currently the firm has 1 million shares outstanding, each sells for $20, total worth of shares: $20 million. It has assets (buidings, equipment, patents etc) worth $20 million. All financed by shares (called equity) and no debt. The firm is considering a new investment project costing $20 million thus bringing its total worth to $40 million. Three different method of financing are considered: (1) all equity (2) half equity half debt (3) all debt. Assuming Return on Assets (ROA) next year will turn out to be 30%, calculate Earnings per Share (EPS) under the three different financing packages. Show your work by filling in the BLANK cells. Debt carries an interest rate of 20%. (25 points)

Package1 Package2 Package3
Assets (mill) $40 $40 $40
Debt $0
Equity $30
Number of shares (mill) 2 1,5 1
Debt/Equity Ratio

Package1 Package2 Package3
Operating Earn. (mill) $12
Interest expense (mill) $0
Earnings for owners (mill) $12 $10 .
Number of shares (mill)
Earnings per share $6 $6,67 $8

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