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The financial manager of Ballpoint Inc. estimates that she will increase earnings per share of her presently all-equity-financed firm if she borrows at the going
The financial manager of Ballpoint Inc. estimates that she will increase earnings per share of her presently all-equity-financed firm if she borrows at the going market rate of interest of 5%. She estimates the debt to be risk-free. The beta of the all-equity firm is one. A return of 10% is expected on the all-equity firm, the price/earnings ratio is ten. Expected operating income is $500,000, and 100,000 shares are outstanding. She plans to replace 50% of the firm's equity with debt. If she operates in perfect capital markets (an M-M world), evaluate this decision by providing all the information below: UNLEVERED LEVERED EPS EBIT 500,000 Iwacc NA N/A Is P/E 10 EAC Share price 1.0 _NA_ NIA_ [rm - rt] = The financial manager of Ballpoint Inc. estimates that she will increase earnings per share of her presently all-equity-financed firm if she borrows at the going market rate of interest of 5%. She estimates the debt to be risk-free. The beta of the all-equity firm is one. A return of 10% is expected on the all-equity firm, the price/earnings ratio is ten. Expected operating income is $500,000, and 100,000 shares are outstanding. She plans to replace 50% of the firm's equity with debt. If she operates in perfect capital markets (an M-M world), evaluate this decision by providing all the information below: UNLEVERED LEVERED EPS EBIT 500,000 Iwacc NA N/A Is P/E 10 EAC Share price 1.0 _NA_ NIA_ [rm - rt] =
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