(homemade leverage) You have 100 shares of XYZ, Inc. The firms current capital structure is 30% equity and 70% debt. The stock price is $25 per share and there are 600,000 shares outstanding. You desire lower financial leverage which is 50% debt and 50% equity. The interest rate on the firms debt is 10% per year. There are three possible scenarios for next year. If recession, EBIT will be $3 million. If normal, EBIT will be $5.5 million. If boom, EBIT will be $8 million.

(10 pints) What is the break-even EBIT?

(15 points) How would you homemade your own desired leverage? (Borrow/lend how much money? Buy/sell how many shares?) Verify your answer by showing that the cashflows you receive (after homemade leverage) will be exactly the same as if you buy shares from a company with the desired capital structure.