EW QUESTIONS 1. Earnings per share analysis. Chloroline Inc. has 2 million shares outstanding and no debt. Earnings before inter- est and tax (EBIT) are projected to be $15 million under normal conditions, $5 mil- lion for a downturn in the economic environment, and $20 million for an economic expansion. Chloroline considers a debt issue of $50 million with an 8 percent inter- est rate. The proceeds would be used to buy back one million shares at the current market price of $50 a share. The corporate tax rate is 40 percent. a. Calculate Chloroline's earnings per share (EPS) and return on investment (EPS divided by share price) under the two scenarios, first before any new debt is issued and then after the recapitalization. b. From your answers to part a, would you recommend that Chloroline goes ahead with the recapitalization? 2. Firm value and capital structure in the absence of tax. Assume a zero corporate tax rate. Because both the risk of a firm's equity and debt increase with debt financing, then the value of the firm should decrease when it uses more and more debt. True or false? 3. Homemade leverage. Alberton Inc., an all-equity-financed equipment manufacturer, has announced that it will change its capital structure to one that will have 30 percent of debt, using the proceeds from the debt issue to buy back shares. The firm has one million shares