Question

Asked Nov 1, 2019

Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.

Current Proposed

Assets $10,000 $18,000

Debt $0 $8,000

Equity $10,000 $10,000

Debt/Equity ratio 0.00 1.00

Interest rate n/a 7%

Shares outstanding 500 500

Share price $20 $20

(b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.

Step 1

a)

**Calculation of EPS, ROA and ROE before debt issue:**

**Excel Workings:**

Step 2

**Excel Spreadsheet:**

Step 3

**b)**

**Calculation of EPS, ROA and ROE after debt issue:**

**Excel Wor...**

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