QUESTION 1) Currently the firm has 1 million shares outstanding, each sells for $20, total worth of shares: $20 million. It has assets (buidings, equipment, patents etc) worth $20 million. All financed by shares (called equity) and no debt. The firm is considering a new investment project costing $20 million thus bringing its total worth to $40 million. Three different method of financing are considered: (1) all equity (2) half equity half debt (3) all debt. Assuming Return on Assets (ROA) next year will turn out to be 30%, calculate Earnings per Share (EPS) under the three different financing packages. Show your work by filling in the BLANK cells. Debt carries an interest rate of 20%. (25 points)

		Package1	Package2	Package3
	Assets (mill)	$40	$40	$40
	Debt	$0
	Equity		$30
	Number of shares (mill)	2	1,5	1
	Debt/Equity Ratio
		Package1	Package2	Package3
	Operating Earn. (mill)	$12
	Interest expense (mill)	$0
	Earnings for owners (mill)	$12	$10 .
	Number of shares (mill)
	Earnings per share	$6	$6,67	$8

QUESTION 2) All is as in problem1. Now suppose ROA next year turns out to be 10%. Fill in the BLANKS. (25 points)

		Package1	Package2	Package3
	Assets (mill)	$40	$40	$40
	Debt		$10
	Equity			$20
	Number of shares (mill)
	Debt/Equity Ratio		33%
		Package1	Package2	Package3
	Operating Earn. (mill)			$4
	Interest expense (mill)		$2
	Earnings for owners (mill)	$4
	Number of shares (mill)	2	1,5	1
	Earnings per share	$2	$1,33	$0