Phillips Company is a young technology firm that has historically avoided debt but is not considering to borrow from a bank. It currently has 8.365 million shares outstanding valued in the market at $41.76 per share.The firm is considering borrowing $60 million for ten years at an interest rate of 3.14% per year and would only make interest payments quarterly until the loan matures. Since Phillips Company generates sufficient operating cash flow to fund its investments internally, money raised from bank loans will be used to repurchase some outstanding shares.It is so profitable that its earnings per share have increased each of the last five years. In the past fiscal year, earnings were $37.8 million ($4.52 per share).Phillips Company has a tax rate of 20%.

A. If the firm takes out a bank loan and uses the proceeds to repurchase outstanding shares, what would be its new leverage ratio?

B. Phillips Company took the bank loan at the beginning of the fiscal year of 2019. At the end of 2019, the company issued an announcement bragging about their sixth straight year of EPS growth, announcing an EPS of $4.60.What would be its EPS had the firm not altered its leverage ratio?

C. Does the increase of EPS from $4.52 to $4.60 mean that the adoption of leverage created value for Phillips' shareholders? Explain.

D. If the cost of capital for Phillips before the debt issuance was 12%, what should be the required rate of return for equity after the debt issuance. What will be the new cost of capital for the firm?