Question 1

1. The National Powerhouse Company currently has no debt in its

capital structure. The company has decided to restructure, raising $5

million debt at 12 per cent. ABC currently has 500 000 shares on

issue at a price of $200 per share. As a result of the restructure, what

is the minimum level of EBIT the company needs to maintain EPS

(the break-even EBIT)?Ignore taxes

Question 2

1. ABC associates have estimated EBIT of 400, the tax rate is 35% and

the Return on the Unleveraged Firm RUis 14%. Suppose ABC takes

up the Debt from 0 to $200 at 10%, what is the Value of Leveraged

Firm,Value of Unleveraged Firm and the Value of Equity?

Question 3

For the National Powerhouse Company given in problem 1, compute

the interest tax shield if the tax rate is 35%. If the company maintains

the same operations and hence EBIT of $100,000 and the required

rate of return on unleveraged firm is 13%, what is the Value of

leveraged firm