Company ABC expects next years operating earnings (EBIT) to be $2 million. Suppose it has total assets of $10 million and no debt. It currently has 1 million shares outstanding with a book value of $10 per share. It is planning a capital restructuring to achieve a debt-to-book equity ratio of 1. Based on yields on similar debt in the marketplace, the company estimates that it will have to pay 6% interest rate if it issues bonds. The income tax rate applicable to the company is 25%.

Return on equity is calculated as: Net income/shareholders equity.

After the capital restructuring: Determine the Degree of Financial Leverage (DFL) at an operating income of $2 million. What is the ROE and DFL if operating income is: $500,000 or $1 million? Compare with the no leverage case and explain your observations. (10 marks)

Detailed workings is needed thanks!