Question 8 The Dark Knight Company has no outstanding debt and a total market value of $160,000. Earnings before interest and taxes are projected to be $15,000 if market conditions are normal. Should there be an expansion in the economy, the EBIT will increase by 30% and if there is a recession, the EBIT will be 60% lower. Dark Knight is contemplating a $50,000 debt issue at 5% per annum. The proceeds from this debt issue will go into repurchasing shares of stock. There are currently 2500 shares outstanding. We assume Dark Knight does not pay taxes. (a) Calculate the earnings per share (EPS) for each of the economic conditions before the issue of debt. What is the percentage change in EPS when the economy expands or contracts? [6 marks] Dark Knight has gone through with the recapitalization process via the stock repurchase. Repeat part (a) and discuss the changes. (9 marks] (b) (c) Discuss the Modigliani - Miller theory of capital structure. [10 marks; Word Limit 500 words)