7. CU Engineering is a producer of wind turbines. CUs situation is as follows:

EBIT= $4 million, tax rate = 35%, debt = $2 million with an cost of debt is 10%, cost of equity is 15%,

shares outstanding are at 600,000, book value of $10/share. CU believes its product market is stable and

the company expects no growth, all earnings paid out as dividends. (Again, three distinct parts to this

question)

A) What are CUs earnings per share and its price per share?

B) What is CUs WACC?

C) CU can increase its debt by $8 million to a total of $10 million, using the new debt to buy back and

retire some of its stock at the current price. The new interest rate on the debt will be 12% (after calling

and refunding its old debt, selling new debt) and the cost of equity will rise from 15% to 17%. EBIT will

remain constant. Should CU change its capital structure? Why or why not (expand upon your answer)?