Reference no: EM131603453

All Star Production Corporation (APC) is considering a recapitalization plan that would convert APC from its current all-equity capital structure to one that includes some financial leverage. APC now has 10,000,000 shares of common stock outstanding, which are selling for $40.00 each. You expect the firm’s EBIT to be 450,000,000 per year for the foreseeable future. The recapitalization proposal is to issue3 $100,000,000 worth of long-term debt, at an interest rate of 6.50% and then to use the proceeds to repurchase as many shares as possible at a price of $40.00 per share. Assume there are no market frictions such as corporate or personal income taxes. Calculate the expected return on equity for APC shareholders under the current all-equity capital structure and under the recapitalization plan. a. Calculate the number of shares outstanding, the per-share price, and the debt-to-equity ratio for APC if it adopts the proposed recapitalization. b. Calculate the earnings per share (EPS) and return on equity (ROE) for APC shareholders under the current all-equity capitalization as well as under the proposed mixed (debt/equity) capital structure. c. Calculate the breakeven level of EBIT, where earnings per share for APC stockholders are the same under both the current and proposed capital structures. d. At what level of EBIT will APC shareholders earn zero EPS under the current and proposed capital structures?