XYZ Inc. is an unlevered firm with total assets of $10,000,000 with a stock price of $10. It is contemplating the acquisition of distressed company JJCorp with a debt of $5,000,000 at 10%. XYZ's board is undecided on the form of financing. Borrowing to finance the acquisition leads to an EPS of 1.5; while issuing equity decreases its EPS to 1.2. You currently own 10,000 shares of XYZ Inc. How much would you have to borrow to replicate the payoff of XYZ Inc? How many additional shares would you need to buy to replicate that payoff? What would your total earnings be? Assume a 40% Tax rate.

	A.	$10,000/2,000/$10,000
	B.	$1,000/200/$45,000
	C.	5,000/12,500/$50,000
	D.	$50,000/5,000/$15,000

The ABC firm has a value of $2,000,000 with 125,000 shares outstanding at $12 per share. With this capital structure, its Debt-to-Equity ratio should be:

	A.	11%
	B.	$2
	C.	33%
	D.	.11%