1. You currently own 1200 shares of SkyTech Inc. SkyTech is an all-equity firm that has 250,000 shares of stock outstanding at a market price of $30 a share. The company's earnings before interest and taxes are $300,000. Assume no corporate taxes. SkyTech has decided to issue $3,375,000 of debt at 6 percent interest. This debt will be used to repurchase shares of stock of the company. If you prefer the original capital structure of 100% equity and the associated payoffs, you will take which of the following actions to achieve the original payoffs (under 100% equity)?

A. borrow $36,000 at 6% and use the entire amount to purchase additional shares of SkyTech

B. borrow $18,000 at 6% and use the entire amount to purchase additional shares of SkyTech

C. borrow $16,200 at 6% and use the entire amount to purchase additional shares of SkyTech

D. sell 600 shares of SkyTech and loan out the proceeds at 6%

E. sell 540 shares of SkyTech and loan out the proceeds at 6%

2. Using information above regarding SkyTech Inc., which of the following statements is correct regarding the earnings per share (EPS) of the firm?

A. EPS will stay the same before and after the firm takes on the debt

B. EPS will increase after the firm takes on the debt

C. EPS will decrease after the firm takes on the debt

D. new EPS will be higher than $1 after the firm takes on the debt

E. there is not enough information to decide how EPS will change after the firm takes on the debt