calculate the earnings per share and expected return on equity for MEC shareholders under both the current all-equity capital structure and under the recapitalization plan.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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As CFO of the Magnificent Electronics Company (MEC), you are considering a recapitalization plan that would convert MEC from its current all-equity capital structure to one including substantial financial leverage. MEC now has 1,000,000 ordinary shares outstanding, which are selling for $30 each, and you expect the company’s EBIT to be $3,600,000 per year for the foreseeable future. The recapitalization proposal is to issue $15,000,000 worth of long-term debt at an interest rate of 6.0% and use the proceeds to repurchase 500,000 ordinary shares worth $15,000,000. Assuming there are no market frictions such as corporate or personal income taxes, calculate the earnings per share and expected return on equity for MEC shareholders under both the current all-equity capital structure and under the recapitalization plan.

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