Question 1 (14 marks)

In 2020, Eastern Hover reported the following information:

- Net Income: $1,500 million

- Interest Expense: $ 500 million

- Book Value of Equity: $7.5 billion

- Book Value of Debt: $7 billion

The firm also paid out total dividends of $660 million in 2020. Its corporate tax rate is 40%.

Analysts believe that Hover could take the following restructuring actions to improve its financial position:

- Sell its media division (at a market value of $2.5 billion), which has a total book value of assets of $2,500 million and has only $100 million in earnings before interest and taxes.

- Use the cash from the sale of media division to pay down debt and improve its bond rating (leading to a decrease in the interest rate to 7%).

- Reduce the dividend payout ratio to 40% and reinvest more back into the business.

a) What is the expected growth rate in EPS, assuming that the reported figures in 2020 remain unchanged? (4 marks)

b) What is the expected growth rate in EPS, if the restructuring plan described above is put into effect? (10 marks)

How to answer (a) and (b)?