Question 6 a) Explain and evaluate the assertion that substituting relatively cheap debt for relatively expensive equity capital will reduce a company's weighted average cost of capital. (13 marks) b) A company currently employing no debt financing has 100m shares outstanding and the market price of a share is 3.00. It has expected pre-tax earnings of 60m and the tax rate is 40 per cent. The company is considering re-structuring its financing to introduce some gearing to increase its earnings per share. It is considering issuing debt of 90m at 8 per cent and using the proceeds to buy back 30m shares. Determine the expected earnings per share before and after the proposed restructuring and carefully explain the difference. (13 marks) c) Does the impact of gearing on the expected rate of return on equity capital provide a good basis for assessing the introduction of gearing? Explain the basis of your answer. (7 1/3 marks) (TOTAL 33 1/3 MARKS)