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a. In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000.

a. In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Earnings Per Share (EPS) from to current to the proposed structure?

Current Proposed
Assets $ 10,000,000 $ 10,000,000
Debt $ 0 $ 4,000,000
Equity $ 10,000,000 $ 6,000,000
Debt-Equity Ratio 0 0.67
Share Price $ 25 $ 25
Shares Outstanding 400,000 240,000
Interest Rate N/A 10 %

b. In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Return on Equity (ROE) from to current to the proposed structure?

Current Proposed
Assets $ 10,000,000 $ 10,000,000
Debt $ 0 $ 4,000,000
Equity $ 10,000,000 $ 6,000,000
Debt-Equity Ratio 0 0.67
Share Price $ 25 $ 25
Shares Outstanding 400,000 240,000
Interest Rate N/A 10 %

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