The Company has 5 million shares on issue with a market price of $2.50 each. The company has no debt however, they are considering changing the capital structure of their business by issuing $3 million of debt & using all the proceeds to conduct a buyback of the shares. The company tax rate is 30% and Interest rate on debt is 10% p.a

• Please calculate EPS for both the current and the proposed capital structures at a projected EBIT level of $6 million. Which capital structure is preferable if this is the expected level of EBIT?

• At what level of EBIT is the company indifferent between the two capital structures under consideration?

• Graph the current and proposed capital structures.