River Cruises current financial position is shown in the table below. Suppose that River Cruises, which currently is all-equity financed, issues $300,000 of debt and uses the proceeds to purchase30,000 shares. 

A.Assume the firm pays no taxes and that debt finance has no impact on its market value, and assume the interest rate on debt is 10%. Rework the table below to show how earnings per share and share return now vary with operating income. B.Now suppose that the tax rate on corporate income is 20%. Recalculate the table. C.Calculate the value of the firm with the presence of taxes. Should the firm increase debt as high as possible?

 

Answer A

                                          

	Slump	Normal	Boom
(A)Operating Income	$ 75,000	$ 125,000	$ 175,000
Interest	$ 30,000	$ 30,000	$ 30,000		# of Shares	100000
Equity Earnings	$ 45,000	$ 95,000	$ 145,000		Market Value of Equity	1 million
EPS	0.643	1.360	2.070		Market Value of Debt	$ 300,000
ROE	6.43%	13.60%	20.70%		Interest Rate	10%

 

Answer C

  

C) V = E +D + PV of tax shield = 1060

; should not increase as much as possible as financial risk/ costs will rise

 

My question:

 

Can you explain to me how they got EPS & ROE, please be clear to help me to know?

 

Again can you explain to me how they got 1060 in answer C ,I can't see E+D+PV PF TAX SHIELD?TKX