Lemmon Inc. is an unlevered firm valued at $700 million with no future growth opportunities, and the company has 10 million shares of stock outstanding. The company expects to earn $51.75 million of earnings before interest and taxes (EBIT) in the next year under normal economic conditions. If economic conditions are better than normal, Lemmon expects 40% higher EBIT (i.e., $72.45 million). If instead, economic conditions are worse than normal, Lemmon expects to earn 40% lower EBIT (i.e., $31.05 million). The management team at Lemmon is considering changing its capital structure by borrowing $280 million, and using these funds to repurchase shares of its stock. Answer the following questions.

Assume zero corporate taxes. Calculate the number of shares that Lemmon would repurchase under the proposed capital structure change. (5 points)

ANSWER TO Question 4a:

Number of shares to repurchase = ______________

Assume zero corporate taxes. Calculate Lemmons earnings per share (EPS) under the normal scenario if they continue to be unlevered versus if the company pursues the proposed capital structure change. (5 points)

ANSWER TO Question 4b:

EPS if unlevered (normal scenario) = $__________

EPS if levered (normal scenario) = $___________

Lemmons management team knows that the EPS and return on equity (ROE) with no leverage changes by 40% (up in the better scenario and down in the worse scenario) in the non-normal economic scenarios (compared to the normal). By what percentage does EPS and ROE change in the non-normal economic scenarios (compared to the normal scenario) if the company pursues the proposed capital structure change? (3 points)

ANSWER TO Question 4c:

Percentage change in EPS and ROE if levered = _________%

Assume a 20% corporate tax rate. Calculate the value of Lemmon Inc. stock per share if it announces that it plans to pursue the proposed capital structure change. (5 points)

ANSWER TO Question 4d:

Value of Lemmon stock per share if levered = $___________

Assume a 20% corporate tax rate. Calculate the EPS and ROE of Lemmon under the worse than normal economic scenario in both the unlevered case versus the case in which the company pursues the proposed capital structure change. (4 points)

ANSWER TO Question 4e:

Worse than normal scenarios	Unlevered	Levered
EPS	$_________	$________
ROE	________%	________%

What is your conclusion regarding this proposed capital structure change for Lemmon (GOOD or BAD)? Please justify and cite specific statistics from your overall analysis. (3 points)

ANSWER TO Question 4f:

GOOD or BAD: ____________

WRITE YOUR RESPONSE HERE