1.An all-equity firm is about to convert its capital structure to one that is 50% debt by borrowing and repurchasing shares.Currently, there are 5,000 shares outstanding and the price per share is $59.The firm's EBIT is expected to be $43,600, in perpetuity.The interest rate on debt is 7% and there are no taxes.What is the earnings per share under the proposed capital structure?

Recall that the EPS is equal to the net income divided by shares outstanding.

2.A firm intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,300. One-year interest rates are 9 percent. There is a 65 percent probability that long-term interest rates one year from today will be 13 percent, and a 35 percent probability that they will be 8 percent. Assuming that the bonds will be called if interest rates fall, what annual coupon should the bond pay in order to sell at par value?

3.A firm expects its EBIT to be $171,000 every year, in perpetuity.The company is currently unlevered with a cost of equity of 19%.It faces a tax rate of 23%.The firm plans to borrow $165,000 and use the proceeds to repurchase shares.If the firm's cost of borrowing is 12%, what is its WACC after the recapitalization?Hint: use MM Prop I to find the market value of equity and MM Prop II to find the cost of equity.