Use the following to answer questions 18-21

	Current cap. structure	Proposed cap. structure
Assets	$15 million	$15 million
Debt	$0	$5 million
Equity	$15 million	$10 million
Share price	$25.00	$20.00
Shares outstanding	600,000	???
Bond coupon rate	N/A	8%

Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values. Ignore taxes.

18. How many shares would be outstanding under the proposed capital structure?

A) 600,000 shares

B) 500,000 shares

C) 400,000 shares

D) 300,000 shares

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

A) $6.25

B) $5.00

C) $4.17

D) $3.33

20. What is the return on equity for the proposed capital structure if the expected state occurs? ROE = NI/Eq

A) 16.7%

B) 18.5%

C) 21.0%

D) 22.4%

21. Which of the following is the correct calculation to find EBIT*, the breakeven EBIT

for these two capital structures?

A) EBIT*/400,000 = [EBIT*-($5,000,000x.08)]/600,000

B) EBIT*/600,000 = [EBIT*-($5,000,000x.08)]/400,000

C) EBIT*/600,000 = [EBIT*-($5,000,000x.08)]/500,000

D) EBIT*/500,000 = [EBIT*-($5,000,000x.08)]/400,000