EASYLIFE Corporation currently has no debt on its capital structure. The companys CEO is considering a restructuring that would involve issuing debt and using the proceeds to buy back some of the companys outstanding equity. See Table 1 below. Table 1: EASYLIFE Current and Proposed Capital Structure * Assumes restructuring does not influence share price. Also, ignore the taxes.

Current Proposed

Assets $6,500,000 $6,500,000

Debt $0 $3,250,000

Equity $6,500,000 $3,250,000

Debt/equity ratio 0 1

Share price* $10 $10

Shares outstanding 650,000 325,000

Interest rate n/a 10%

As shown in the table, the firms assets are $6.5 million and shares outstanding are 650,000. Because the company is an all-equity firm, the price per share is $10. The proposed debt issue would raise $3,250,000; the bonds will be issued at par with the coupon rate 10% and for the required return on debt of 10%. Since the stock sells for $10/share, $3,250,000 debt would purchase (3,250,000/10) 325,000 shares and leaving 325,000 outstanding as given in the table 1. EASYLIFE Corporation would have a debt/equity ratio of 1 (i.e., 50% of debt). You need to investigate the impact of proposed restructuring under three scenarios (or three states of the economy) recession, normal, and expansion. Earnings before interest and taxes, EBIT, are projected to be $450,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 15% lower. Based on the given information, answer the following questions.

a) Compute ROE and EPS under the companys current capital structure under three economic conditions. Current Proposed Assets $6,500,000 $6,500,000 Debt $0 $3,250,000 Equity $6,500,000 $3,250,000 Debt/equity ratio 0 1 Share price* $10 $10 Shares outstanding 650,000 325,000 Interest rate n/a 10% COMM 320 Project

b) Compute ROE and EPS under the companys proposed capital structure under three economic conditions.

c) Investigate the behavior of ROE and EPS under current and proposed capital structures. 5. Pick two of your favorite public companies and analyze their performance during the COVID19 pandemic. (Hint: Go to Capital IQ database and use the charting option; pick the data for one year)