Problem #2 Breakeven EBIT and Leverage

PB&J Company is considering one of two capital structures. Plan A calls for 456,750 shares of stock as an all-equity company. Plan B calls for 331,850 shares of stock with debt of $5.75 million in debt? Interest rate on the debt is 8.75%. Ignore taxes. Calculate the EPS for each proposal under the following parameters.

Which company structure has the higher earnings per share if net income is $1,150,000?

Which company structure has the higher earnings per share if net income is $2,415,000?

What is the breakeven level of income between the proposed plans and how much is the EPS on that level of income?

Problem #3 Calculating WACC

Blizzard Inc. has a debt to equity ratio of 1.25. Its weighted average cost of capital is 8.65% and its cost of debt is 7.15% Corporate tax rate is 30%.

What is the company's cost of equity capital?

What is the company's unlevered cost of capital?

What would the cost of equity be if the if the debt to equity ratio was 2.5? What would the WACC be if the debt to equity ratio was 2.5?

Problem #4 Firm Value

TBone Corporation expects to have an EBIT of $194,660 for the foreseeable future. The firm is an all equity firm with a 12.6% cost of equity. The firm tax rate is 40%.

What is the current value of the company?

TBone is considering borrowing at 7%, what would the company be worth if it takes on debt equal to 30% of its unlevered value? What if it takes on debt equal to 45% of its unlevered value?

Problem #5 MM Propositions

ND Corporation is planning to repurchase part of its common stock by converting that financing to debt. The debt to equity ratio is expected to increase from 15% to 35%. Current debt is $775,000. Debt interest is 6.3%. EBIT is expected to be $276,800. Ignore taxes.

What is the market value of the company before and after the debt restructuring plan?

What is the expected return on the company's equity before the restructuring is completed?

What is the expected return on the equity of an otherwise identical all equity firm?

What is the expected return on the equity after the restructuring is complete?