Glamour Pty Ltd, an unleveraged company (i.e., an all-equity company), has an expected EBIT of $600,000. The required return on assets is 10.5%. The company has 210,000 outstanding shares, currently traded at $12 per share. The company is considering raising $720,000 in debt with a required return of 4.5%. It would use the proceeds to repurchase outstanding shares at the market price. Glamour is subject to a 30% corporate tax rate.

Part A What is the residual income of Glamour's shareholders before and after issuing the $720,000 debt? Calculate the EPS and return on equity in both cases.

Part B Calculate the present value of the interest rate shield assuming the new debt has no maturity.

Part C Comment on the following statement: "As the debt level in the capital structure increases, the cost of equity will increase accordingly. As such, the weighted average cost of capital will always increase as the company keeps borrowing." Do you agree or not agree?