Question
1)McMill Industries is currently 100% equity financed. The company produces an annual EBIT of $150,000 which is stable over the years. It has 25,000 shares
1)McMill Industries is currently 100% equity financed. The company produces an annual EBIT of $150,000 which is stable over the years. It has 25,000 shares outstanding with a market price of $30 a share. The firm is planning to sell bonds to raise $300,000 in debt capital to be used for repurchasing shares. The cost of debt is 8% and the tax rate is 25%.
a)What would be the earnings per share (EPS) if the company issues the debt and EBIT remains constant?(4 Marks)
b)What will be the value of the firm after the leverage? (2 Marks)
c)What will be the share price after the leverage? (2 Marks)
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