Allison Radios manufactures a complete line of radio and communication equipment for law enforcement agencies. The company, worth $80,000,000, is financed entirely by common stock: 2,000,000 shares at $40 per share. The company is considering substituting debt for equity, buying back a quarter of the shares and issuing $20,000,000 of 8 percent debt. Tax rate is 40 %.

1. What is the indifference point in EBIT for the company (show your work)? Solve by setting EPS (or ROE) equal for both options:

EPS = (EBIT Interest) (1-T)/Shares outstanding

(EBIT* 0)(1-.4)/2,000,000 = (EBIT* 1,600,000)(1-.4)/1,500,000

EBIT* = 6,400,000

**this is already solved nothing to do here just below questions 2. What is the ROE and EPS at this point (show your work)?

EPS = $1.92 ROE = .048

** have the answer can you show the work 3. If the beta for the company is currently 0.80, what will be the beta of the new levered firm (show your work)?

BL = Bu [1 + (1-t) D/E] = 0.8[1 + (1-.4)20/60] = 0.96

*could you show where the bold 20/60 comes from