Gentry Motors Inc., a producer of turbine generators, is in this situation: EBIT = $4 million, tax rate = T = 35%, debt outstanding = D = $2 million, rd = 10%, rs = 15%, shares of stock outstanding = N0 = 600,000, and book value per share = $10. Because Gentrys product market is stable and the company expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds.

1. Gentry can increase its debt by $8 million to a total of $10 million, using the new debt to buy back and retire some of its shares at the current price. Its interest rate on debt will be 12% (it will have to call and refund the old debt), and its cost of equity will rise from 15% to 17%. EBIT will remain constant. Should Gentry change its capital structure? Why or why not?
2. If Gentry did not have to refund the $2 million of old debt, how would this affect the situation? Assume that the new and the still outstanding debt are equally risky, with rd = 12%, but that the coupon rate on the old debt is 10%.
3. What is Gentrys TIE coverage ratio under conditions in Part A of this question?