BSTAR Inc. is debating whether or not to convert its all-equity capital structure to one that is 50% debt. Currently there are 4,000 shares outstanding and the price per share is $100. EBIT is expected to remain at 60,000 per year forever. The interest rate on new debt is 10%, and there are no taxes.

1. At which level of EBIT, leverage will be beneficial for the shareholders (EBIT Breakeven point)? should the company restructure and use debt financing?

3. Adam, a shareholder of the firm owns 100 shares of stock. He likes leverage. What is his cash flow under the current capital structure, assuming the firm has a dividend payout ratio of 100%?
4. What would Adams cash flow be under the proposed capital structure of the firm?

4. Suppose BSTAR doesnt convert; show how he could recreate the cash flow from the levered firm using homemade leverage. Explain.