Question $1.(20$ points$)$ EBIT and Leverage $[$LO$1]$ Ghost, Inc., has no debt outstanding and a total

marketvalue of $$185,000.$ Earnings before interest and taxes, EBIT, are projected to be $$29,000$ if

economic conditions are normal. If there is strong expansion in the economy, then EBIT will be $30$

percent higher. If there is a recession, then EBIT will be $40$ percent lower. The company is considering

a $$65,000$ debt issue with an interest rate of $7$ percent. The proceeds will be used to repurchase shares

of stock. There are currently $7,400$ shares outstanding. Ignore taxes for this problem. a$.$ Calculate earnings per share $($EPS$)$ under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enters a recession. Repeat part $($a$)$ assuming that the company goes through with recapitalization. What do

you observe? Question $2.(20$ points$)$ ROE and Leverage $-$ Suppose the company in Problem $1$ has a market$-$tobook ratio of $1\mathrm{.}0$ and the stock

price remains constant. a$.$ Calculate return on equity $($ROE$)$ under each of the three economic scenarios before any debt is issued. Also calculate the

percentage changes in ROE for economic expansion and recession, assuming no taxes. b$.$ Repeat part $($a$)$ assuming the firm goes through with the proposed recapitalization c$.$ Repeat parts $($a$)$ and $($b$)$ of this problem assuming the firm has a tax rate of $21$ percent. Question $3.(25$ points$)$ Break$-$Even EBIT and Leverage

Bellwood Corp. is comparing two different capital structures. Plan I would result in $12,700$ shares of stock and $$109,250$

in debt. Plan II would result in $9,800$ shares of stock and $$247,000$ in debt. The interest rate on the debt is $10$ percent. a$.$ Ignoring taxes, compare both of these plans to an all$-$equity plan assuming that EBIT will be $$79,000.$ The all$-$equity plan would result in

$15,000$ shares of stock outstanding. Which of the three plans has the highest EPS? The lowest? b$.$ In part $($a$),$ what are the break$-$even levels of EBIT for each plan as compared to that for an all$-$equity plan? Is one higher than the other?

Why? c$.$ Ignoring taxes, when will EPS be identical for Plans I and II$?$ d$.$ Repeat parts $($a$),($b$),$ and $($c$)$ assuming that the corporate tax rate is $21$ percent. Are the break$-$even levels of EBIT different from before?

Why or why not? Question $4.(20$ points$)$ Calculating WACC $-$ Blitz Industries has a debt$-$equity ratio of $1\mathrm{.}25.$ Its WACC is $8\mathrm{.}3$

percent, and its cost of debt is $5\mathrm{.}1$ percent. The corporate tax rate is $21$ percent. What is the company$$s cost of equity capital? b$.$ What is the company$$s unlevered cost of equity capital? c$.$ What would the cost of equity be if the debt$-$equity ratio were $2?$ What if it were $1?$ What if it were zero?