Water Falls Inc. has an all-equity capital structure with an expected EBIT of $100,000 per year (in perpetuity). The firm has 200,000 shares outstanding. The cost of equity is 10%.

(a) Determine the firm's current share price. What is the firm's earnings per share (EPS)?

(b) The firm is considering whether to add leverage to its capital structure: the firm would borrow to repurchase some shares and have a debt-equity ratio of 0.25. What will be the firm's EPS under this plan?

(c) Is EPS in (b) higher or lower than in (a)? What could be the reason for the difference?