There are no taxes. EBIT is expected to be $2.625 million, but could be as high as $3.375 million if an economic expansion occurs, or as low as $1.875 million if a recession occurs. All values are market values.

1. What is EPS under the current capital structure if there is a recession?

2. What is EPS during an expansion for the proposed capital structure?

3. What is ROE for the proposed capital structure if the expected state occurs?

4. What is the break-even EPS for these two capital structures?

5. Will the proposed capital structure affect the total value of the firm? Discuss.

6. Suppose now that corporate taxes are in effect at a rate of 40.00% (this assumption will

   also hold for g. and h.). What is the cost of equity for the unlevered firm based on

   expected EBIT?

7. What is the cost of equity of the levered firm?

8. What is the value of the levered firm?

Use the information below for M&M Inc. to answer the questions that follow: Current cap. structure Proposed cap. structure Assets 22,500,000.00 $ $ 22,500,000.00 7,500,000.00 Debt Equity Share price Shares outstanding Bond coupon rate 22,500,000.00 $ 18.75 $ 1,200,000 ??? 15,000,000.00 15.00 N/A 6%