outline The EA Toys has no debt outstanding, and its financial position is given by the following data: Assets (Market value = book value) $5,000,000 EBIT $200,000 Cost of equity, rs 12% Stock price, Po $20 Shares outstanding, no 250,000 Tax rate, T (federal-plus-state) 30% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 25% debt based on market values, its cost of equity, rs, will increase to 14% to reflect the increased risk. Bonds can be sold at a cost, rd, of 10%. EA is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. 1. What effect would this use of leverage have on the value of the firm? Explain using relevant calculations. 2. What would be the price of EA's stock? 3. What happens to the firm's earnings per share after the recapitalization? outline The EA Toys has no debt outstanding, and its financial position is given by the following data: Assets (Market value = book value) $5,000,000 EBIT $200,000 Cost of equity, rs 12% Stock price, Po $20 Shares outstanding, no 250,000 Tax rate, T (federal-plus-state) 30% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 25% debt based on market values, its cost of equity, rs, will increase to 14% to reflect the increased risk. Bonds can be sold at a cost, rd, of 10%. EA is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. 1. What effect would this use of leverage have on the value of the firm? Explain using relevant calculations. 2. What would be the price of EA's stock? 3. What happens to the firm's earnings per share after the recapitalization