Exhibit 4. A firm wishes to recapitalize its position. Currently, its capital structure is such that it is comprised of 40% debt and 60% equity. Thus, the firm is already LEVERED. The firms current data is as follows:

EBIT $1,500,000 Cost of debt 9.00%

Capital $4,000,000 Cost of equity 11.50%

Taxes 20.00% Shares Outstanding 500,000

Stock price per share $19.72 Beta 1.50

EPS $2.17 Risk free rate 2.50%

Growth on dividends 3% Market risk premium 6.00%

Dividend policy: 75% earnings payout

The company plans to retire its current debt completely at the end of the year. Then it plans to issue a new round of debt, hopefully at a lower rate than what they are paying now. They plan to use all debt dollars to repurchase stock. They are currently considering the following debt schedule:

Amount borrowed Bond rating Cost of Debt

$400,000 AAA 4.00%

$800,000 AAA 5.00%

$1,200,000 AA 6.00%

$1,600,000 A 8.00%

$2,000,000 BBB 10.00%

$2,400,000 BB. 12.00%

$2,800,000 BB 13.00%

$3,200,000 B 14.00%

$3,600,000 B 15.00%

Refer to Exhibit 4. At what new level of debt does EPS max out at? What is that EPS value?