Magic Production Company (MPC) is considering a recapitalisation plan that would convert MPC from its current all-equity capital structure to one including some financial leverage. MPC now has 8 million ordinary shares outstanding, which are selling for $50.00 each. Currently, MPC shareholders have a required return of 12%. The expected earnings before interest and taxes (EBIT) of MPC is $48,000,000 per year for the foreseeable future. The recapitalisation proposal is to issue $100,000,000 worth of long-term debt at an interest rate of 4 per cent and use the proceeds to repurchase as many shares as possible at a price of $50.00 per share. Assume there are no market frictions such as corporate or personal income taxes. (i) Calculate the number of shares outstanding and the debt-to-equity ratio for MPC if the proposed recapitalisation is adopted. (Marks: 1) (ii) Calculate the expected earnings per share (EPS) and the expected return on equity (ROE) for MPC shareholders under the proposed mixed debt/equity capital structure. How does it compare to the EPS and ROE under the current capital structure? Filling up the following table will help you in answering this question. (Marks: 4) All Equity Financing New Capital Structure EBIT Interest Net Income Shares Outstanding Earnings per share (iii) Calculate the break-even level of EBIT where earnings per share for MPC shareholders are the same under the current and proposed capital structures. Please show your calculations clearly. (Marks: 2) (iv) If the proposed recapitalization plan is adopted, what will be the likely impact on the equity beta of MPC? Provide a brief explanation for your answer.

	All Equity Financing	New Capital Structure
EBIT
Interest
Net Income
Shares Outstanding
Earnings per share