Suppose the CFO of a firm Mr. X is considering a restructuring that would involve issuing debt and using the proceeds to buy back some of the outstanding equity. Suppose Mr. X is planning to issue debt of amount $4,000,000. Below are current structure and the proposed structure of the firm.

                         Current Structure        Proposed Structure

Assets                    $8,000,000               $8,000,000

Debt                          $0                           $4,000,000

Equity                    $8,000,000                   $4,000,000

Debt-Equity Ratio           0                             1

Share Price                    $20                           $20

Shares outstanding      4,00,000                     2,00,000

Interest Rate                       10%                       10%

Now consider going forward, there could be three scenarios that may happen. In normal situation, the EBIT is $1 million. In the recession scenario, EBIT falls to $500,000. In the expansion scenario, it rises to $1.5 million. Find the ROE, EPS of the firm in the current and proposed structure. Assume no tax. Interpret the results. Comment on the ROE sensitivity on debt.