Questions 14 and 15 refer to the following information: Faelis Limited is an all-equity publicly listed firm with 500,000 shares currently on issue trading at $10 per share and is expected to generate $500,000 in EBIT p.a. in perpetuity. They are considering immediately repurchasing 20% of their equity at the current market price and replacing this with debt with an interest cost of 5% per annum. Assume that Faelis Limited operate in a perfect capital market with no taxes, information costs, transaction costs etc.

14. How do the (i) Net Income and (ii) ROE of Faelis Ltd change (if at all) with the decision to immediately conduct the repurchase? (show all workings and express percentages to 2 decimal places e.g. 50.04%) [4 marks] .

15. For what value of EBIT will ROE be unaffected by Faelis Ltds decision to repurchase shares? [show all workings including the value of ROE that is the same under both structures]