1. Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding . Ignore taxes for this problem.

a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued . Also calculate the percentage changes in EPS when the economy expands or enters a recession .

b. Repeat part (a ) assuming that the company goes through with recapitalization . What doyouobserve?

3. Suppose the company in Problem 1 has a market-to-book ratio of 1.0 and the stock price remains constant .

A. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued . Also calculate the percentage changes in ROE for economic expansion and recession , assuming no taxes .

B. Repeat part a ) assuming the firm goes through with the proposed recapitalization . . C. Repeat parts (a ) and (b) of this problem assuming the firm has a tax rateof21percent.

4. Foundation , Inc. , is comparing two different capital structures : an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I , the company would have 145,000 shares of stock outstanding . Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in debt outstanding . The interest rate on the debt is 8 percent , and there are no taxes .

5. M&M and Stock Value In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plan What is the valueofthefirm?

6. Break-Even EBIT and Leverage L01, Dickson Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $100,050 in debt. Plan II would result in 9,800 shares of stock and $226,200 in debt . The interest rate on the debt is 10 percent

a. Ignoring taxes , compare both of these plans to an all -equity plan assuming that EBIT will be $70,000 . The all -equity plan would result in 15,000 shares of stock outstanding .

7. Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated byyouranswers?