Question 6 only
Calculate earning share ETS) under each of the three con Before any debris i Alse calculate the percentage changes in Essen # Calculate returneu (RON) under each of the three economic scenti befont debris issued. Also calculate the percentaje changes in ROE Report as that the company mes through with recapital structures an all-equity plan (Plan 1) and a levered plan (Plan II). Under Plan, the economy expands or enters a recession What do you observe 2. KRIT, Taves, and herpe [102Repeat part) and (b)in Problem ming Maynard has a tax rate of 15 percent ROE and Lerruge [LO1, 2) Suppose the company in Problem i hasa met tobook ratio of 1.0 economic expansion and recession, assuming no taxes Repeat pun aming the firm goes through with the proposed recipitalization c. Repeat parts and (b) of this problem assuming the firm has a tax mater en 35 percent company would have 160,000 shares of stock outstanding. Under Plain 11. then would be 80,00 shares of stock outstanding and $2.8 million in debt outstanding The interest rate on the debt is 8 percent, and there are no taxes a. If EBIT is $350,000, which plan will result in the higher EPS? h. IF EBIT is $500,000, which plan will result in the higher EPS? c. What is the break-even EBIT? 5. M&M and Stock Value [101] In Problem 4, use M&M Proposition to find the price per share of equity under each of the two proposed plans. What is the values the firm? 6. Break-Even EBIT and Leverage [LO1, 2] Keenan Corp. is comparing to different capital structures. Plan I would result in 7,000 shares of stock and $160,000 in debt. Plan II would result in 5.000 shares of stock and $240.000 debt. The interest rate on the debt is 10 percent. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming thu EBIT will be $39.000. The all-equity plan would result in 11.000 shares of stick 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 flat for an all-equity plan? Is one higher than the other? Why? c. Tgnoring taxes, when will EPS be identical for Plans I and II? d. Repeat purtsta), (b), and (c) assuming that the corporate tax rate is 40 percent Are the break-even levels of EBIT different from before! Why or why not! 7. Leverage and Stock Value (L01] Ignoring taxes in Problem 6. what is the price per share of equity under Plan 1? Plan II? What principle is illustrates your answers? 8. Homemade Leverage (L01] Seether, Inc., a prominent consumer produto firm, is debating whether to convert its all-equity capital structure to one 35 percent debt. Currently, there are 8,000 shares outstanding, and the price Shure is $55. EBIT is expected to remain at $32,000 per year forever. The rate on new debt is 8 percent, and there are no taxes
