Gabella's is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Travis owns 500 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Travis' annual dividend income?

Increase from $2,000 to $2,094

Increase from $2,400 to $2,160

No change

Decrease from $2,400 to $1,840

Decrease from $2,000 to $1,906

Northern Wood Products is an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000. Based on its current capital structure, the firm is expected to have EBIT of $26,000 if the economy is normal, $3,000 if the economy is in a recession, and $33,000 if the economy booms. Ignore taxes. Management is considering issuing $88,000 of debt with a 6 percent coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?

$0.26

$0.31

-$0.27

$0.03

-$0.19

Snow Mountain Resort has a 33 percent tax rate. Its total interest payment for the year just ended was $6.8 million. What is the interest tax shield?

$2,525,000

$2,410,600

$2,244,000

$2,618,000

$2,006,500