Question 6 Capital Structure 9 marks Jinjins Jewellery Ltd currently has an all equity capital structure with 1,500,000 shares on issue. It is projected that if normal economic conditions continue, then earnings before interest and tax (EBIT) will be $1,000,000. If economic conditions were to decline into a bust state, then EBIT will be 20% lower than normal. On the other hand, if economic conditions improve, and even boom, then EBIT will be 25% higher than normal. Jinjin is considering a capital restructure involving a debt issue in the amount of $8,000,000. The interest rate on debt is currently 5.5% p.a. The debt will be used to repurchase 800,000 shares at a price $10 per share. Ignore company tax. Required: (Please draw up a table to assist with the calculations and formatting of answer) A. Calculate the earnings per share (EPS) for the current capital structure and the proposed capital structure. (7 marks) B. Calculate the breakeven EBIT and advise Jinjin if the proposed capital structure would be advantageous if EBIT was below the breakeven point? (2 marks)

Question 6 - Capital Structure - 9 marks Jinjin's Jewellery Ltd currently has an all equity capital structure with 1,500,000 shares on issue. It is projected that if normal economic conditions continue, then earnings before interest and tax (EBIT) will be $1,000,000. If economic conditions were to decline into a bust state, then EBIT will be 20% lower than normal. On the other hand, if economic conditions improve, and even boom, then EBIT will be 25% higher than normal. Jinjin is considering a capital restructure involving a debt issue in the amount of $8,000,000. The interest rate on debt is currently 5.5% p.a. The debt will be used to repurchase 800,000 shares at a price $10 per share. Ignore company tax. Required: (Please draw up a table to assist with the calculations and formatting of answer) Current Capital Structure: All Equity $15,000,000 Proposed Capital Structure: Debt $8,000,000 & Equity $7,000,000 Bust Normal Boom Bust Normal Boom L- EBIT Interest ----- Net Income EBIT Interest Net Income IS Number of shares on issue Number of shares on issue IEPS IEPS A. Calculate the earnings per share (EPS) for the current capital structure and the proposed capital structure. (7 marks) B. Calculate the breakeven EBIT and advise Jinjin if the proposed capital structure would be advantageous if EBIT was below the breakeven point? (2 marks)