DIY has EBIT of $4 million per year forever. Its cost of equity is 12% and tax rate is 40%. There are 1.2 million shares outstanding. It also has $8 million (face value) perpetual debt which pays annual coupon of 5%, and is trading at 125% of the face value. DIY wants to borrow new perpetual debt of $2 million at current cost of debt to buy back its common stocks. Due to this new debt, there will be present value of bankruptcy cost of $300,000.

1.Calculate the equity value, firm value, stock price, debt equity ratio, and EPS under the current capital structure.

2.Calculate the equity value, firm value, stock price, debt equity ratio, and EPS under the new capital structure.

3.What is the breakeven EBIT of the two capital structures?