Question

166) please assist me with question 6

2. An all-equity firm currently has 2,000,000 shares of stock outstanding and is considering borrowing

$6,000,000 at 8% and buying back one-half of those shares. What is the break-even EBIT assuming a tax

rate of zero?

3. For the firm in #2 what is its EPS (a) before; and (b) after borrowing the $600,000 if its tax rate is zero

and its EBIT is $1,000,000?

4. For the firm in #2 what is its EPS (a) before; and (b) after borrowing the $600,000 if its tax rate is zero

and its EBIT is $800,000?

5. Given the answers to #s 3 and 4, what can you conclude about (a) the impact of borrowing on EPS;

and (b) the role that the level of EBIT vs. its break-even level plays in your answer to part (a) of this

question?

6) If the company above expects its annual EBIT to be a constant $1,000,000 for the foreseeable future, should it undertake the capital restructuring? Why or why not? If the company above expects its annual EBIT to be a constant $800,000 for the foreseeable future, should it undertake the capital restructuring? Why or why not?

Answer 1