Max Inc and Nol Inc are identical firms in all ways except Max employs debt in its capital structure and Nol Inc does not. EBIT for each firm are expected to be $10,000. The total value equity is $40,000 for Max Inc. and $80,000 for Nol Inc. Max Inc has 1000 shares outstanding. Nol Inc. has 2,000 shares outstanding. Max's bond have a market value and face value of $40,000. The interest rate is 10% and there are no taxes.
a. Compute the EPS, ROE and price per share for Max and NOL.
b. In the event of a recession, both Max and Nol will have an EBIT of $5,000. EBIT will be $20,000 in the event of an expansion. Compute EPS and ROE for each of the three scenarios.
c. Suppose that an investor purchased 200 shares of Max and 200 shares of Nol. Compute the cost of these investments and the earnings for these positions under each scenario described in (b)