1. Traditional Company has no debt. The amount of equity and assets is $600,000. There are 15,000 shares outstanding. The book value and market value of the shares are the same: $40. A new board member has suggested that changing the capital structure to include some debt might be a good idea. The CFO has come up with the following data:

Most likely EBIT for next year $450,000

Amount of Proposed Loan $200,000

Interest Rate on Loan 9%

Tax Rate 21%

Compute the earnings per share under each structure.

ROE under current structure ______________ ROE under proposed structure ____________

Should Traditional do the restructuring? ________________

Yes or No