Reference no: EM132589442

ABC company were performing its Business capital structure fully finance by Equity and now it proposed of finance by debt and equity as per the following table. In addition if the economy Recession, Expected or Expansion will expect EBIT of $500,000, 1,000,000 and 1,500,000 respectively.

                                        Current               Proposed

Assets                       $8,000,000              $8,000,000

Debt                               $0                       $4,000,000

Equity                         $8,000,000                   $4,000,000

Debt/Equity Ratio                  0                              1

Share Price                          $20                             $20

Shares Outstanding              400,000                      200,000

Interest rate                              10%                         10%

Based on the above data compute:

Question A) the ROE in the three scenario's for both options/ capital structure

Question B) the EPS in the three scenario's for both options/ capital structure

Question C) what is your recommendation in relation to EPS and capital structure based on the given data

Question D) draw the graph breakeven point of capital structure