I am senior portfolio manager of an international investment bank that oversees a USA investment portfolio with total assets of 25 billion. For company B&G Ltd., the following information is available:

EBIT= 680,000

Interest rate = 8% (before tax)

Expected market return (Rm) = 9%

Total debt = 1 million Tax rate= 40%

of B&G = 1.5

Total equity = 3 million

Risk free rate (Rf) = 6%

a) What do you think about the current structure of capital of this company? Is this company creating value?

b) The CFO suggests buying back shares (at their book value) and thus reducing the equity capital to 2 million (again book value). They will use cash for the buyback and everything else ceteris paribus. Is this a good suggestion? Critically evaluate your answer.