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EBIT = $50 Million last year (not expected to grow) Financed with all equity: 10 million shares out-standing Estimated costs of debt for the firm

EBIT = $50 Million last year (not expected to grow)

Financed with all equity:

10 million shares out-standing

Estimated costs of debt for the firm at different capital structures:

Percent financed with debt, wdrd

0%_

208.0%

308.5%

4010.0%

5012.0%

Recapitalize, then debt would be issued and the funds received would be used to repurchase stock.

40% state-plus-federal corporate tax bracket

1.0 beta

6% risk-free rate

6% market risk premium

a. using the free cash flow valuation model, show only avenues by which capital structure can affect value.

b. what is operating leverage, and how does it affect a firm's business risk? Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variable cost of $10.

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