Scott Motor Cars is currently all equity financed. It has 200,000 shares of equity outstanding selling at $53 per share. The firm is expected to produce a perpetual EBIT of $950,000 and its expected dividend payout is 100%. The firm is considering a capital structure change. The new capital strucutre would have $3,000,000 debt, with a 6% interest rate. The company would use the debt proceeds to repurchase stock. Assume that the restructuing plan will not change the value of the firm. The firm's tax rate is 0%.

1) How many shares of stock will the company repurchase?

2) What are the firm's debt and equity percentages after the restructing?

3) What will the reuiqred return on equity be after the firm issues the debt? (Assume that the firm will continue to pay 100$ of its EPS as a dividend each year, forever)

4) At what level of EBIT will the two plans produce the same EPS?

5) Which plan will the shareholders prefer if the perpetual EBIT turns out to be (in each case, you must briefly explain - and support numerically - your answer)

perpetual EBIT = $800,000

perpetual EBIT = $950,000

perpetual EBIT = $1,100,000