A company is financed totally by equity with 100,000 shares outstanding.

The boss wants to change the capital structure by issuing bonds and using the proceeds to buy back stock.

The firms Share price is $50.00 and its EPS is $3.00.

The company can borrow $1,000,000 at 10%. EBIT is expected to be $500,000 and the tax rate is 40%.

How much will the capitalization increase or decrease shareholder wealth?

(1pts)

$0.00

$0.90

$0.26

$1.10