1. Mr. Smith had planned to buy 200 shares of Boats when it was an all equity firm; however, in the meantime the company issued debt and Mr. Smith does not want to bear the added risk. What can Mr. Smith do in order to receive the same payoff as he would have received if Boats was still an all equity firm? Provide complete numerical calculation and show that payoff is the same.

EBIT

Recession 50,000

Normal 150,000

Expansion 300,000

3. Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit before interest and tax (EBIT) is expected to be either $50,000 during a recession, $150,000 during normal times, and $300,000 in an expansion period. "Boats" is considering issuing $500K debt at 4% interest. With the amount raised, the company intends to buy back shares from the public. There are currently 50,000 shares outstanding. Ignore taxes and assume that EPS is paid as dividend to shareholders