Pablo Limited is an all-equity publicly listed firm with 800,000 shares currently on issue trading at $30 per share and is expected to generate $1,900,000 in EBIT p.a. in perpetuity. They are considering immediately repurchasing one third their equity at the current market price and replacing this with debt with an interest cost of 4% per annum. Assume that Pablo Limited operate in a perfect capital market with no taxes, information costs, transaction costs etc.

a) Demonstrate the impact of the change in capital structure on the (i) Net Income, (ii) ROE and (iii) ROA for Pablo Limited

b) For what value of EBIT will ROE be unaffected by Pablo Ltds decision to repurchase shares? [show all workings including the value of ROE that is the same under both structures]