1. You have recently been hired as a financial analyst for a children's toy manufacturing company. The company is growing and has capital to invest in expansion projects. Currently, your business is financed exclusively with equity there is no debt. The shareholders have however decided to consider the issue of debt which would be used to buy back common shares, which will modify the capital structure of the company and introduce a financial leverage effect.

The current financial structure is as follows: the company's assets have a market value of $12 million. There are currently 400,000 shares outstanding and the stock price is $30 - there is no debt.

The scenario to be considered would be as follows: a bond issue that would raise the sum of 3 million dollars, the coupon rate would be set at 6% for a required return of 6%. It is assumed that the restructuring would have no effect on the share price.

For your analysis, three profitability scenarios will be studied: pessimistic with an EBIT of $450,000, normal with an EBIT of $750,000 and optimistic with an EBIT of $1,050,000. You perform the analysis in a non-tax context.

a) Make a comparative table of the current financial structure vs the proposed structure for your company (4 points). b) Draw up a table leading to the calculation of the return on equity and the EPS of the current financial structure according to the three EBIT scenarios selected (6 points). c) Draw up a table leading to the calculation of the return on equity and EPS of the proposed financial structure according to the three selected EBIT scenarios (9 points). d) Calculate the degree of financial leverage for the current financial structure based on the EBIT of the normal scenario (2 points). e) Calculate the degree of financial leverage for the proposed financial structure based on the EBIT of the normal scenario (2 points). f) Calculate the EBIT which is called the point of indifference to help shareholders decide whether or not to change the financial structure (2 points).

2. Suppose that the company decides not to change the financial structure and that one of the shareholders asks you how he should do to still benefit from financial leverage identical to the proposed structure (using artisanal leverage) . This shareholder currently holds 3,000 shares.

a) What would you recommend to this shareholder to reproduce the desired financial leverage if we assume that this shareholder can borrow funds at the rate of 6% (2 points). b) Support your recommendation by demonstrating with a table what the net profit would be for the shareholder - according to each of the three EBIT scenarios (3 points). c) Demonstrate, using a table including the three scenarios, that the net profit calculated in b) would be identical to that which would have been obtained if the company had carried out the capital restructuring as it would have wished departure (1 points).

3. Now suppose that the company informs you that its current debt-free capital structure corresponds to a WACC of 10% which is significantly higher than the return required of bondholders which is 6%.

a) Redo the detailed WACC calculation according to M&M's proposal II repeat the WACC calculation formula using the BR resulting from the restructuring (4 points). b) If you are now asked to incorporate the effect of taxes into your post-recapitalization WACC calculation and the retained tax rate would be 35% repeat the WACC calculation formula by calculating the resulting ROE restructuring (4 points).