ASAP Please : You have recently been hired as a financial analyst for a children's toy manufacturing company. The compan

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ASAP Please :
You have recently been hired as a financial analyst for a
children's toy manufacturing company. The company is growing and
has capital to invest in expansion projects. Currently, your
business is financed entirely with equity – there is no debt.
However, shareholders have decided to consider issuing debt that
would be used to buy back common shares, which will change the
company's capital structure and introduce a financial leverage
effect.
The current financial structure is as follows: the company's
assets have a market value of $12 million. There are currently
400,000 shares outstanding and the stock price is $30 - there is no
debt.
The scenario to consider would be as follows: a bond issue that
could return $3 million, the coupon rate would be set at 6% for a
required return of 6%. It is assumed that the restructuring would
have no effect on the share price.
For your analysis, three profitability scenarios will be
studied: pessimistic with an EBIT of $450,000, normal with an EBIT
of $750,000 and optimistic with an EBIT of $1,050,000. You perform
the analysis in a non-tax context.
Questions:
a) Make a comparative table of the current financial structure
vs the proposed structure for your company.
b) Make a table leading to the calculation of the return on
equity and the EPS of the current financial structure according to
the three EBIT scenarios retained.
c) Make a table leading to the calculation of the return on
equity and the EPS of the proposed financial structure according to
the three EBIT scenarios retained.
d) Calculate the degree of financial leverage for the current
financial structure based on the EBIT of the normal scenario
e) Calculate the degree of financial leverage for the proposed
financial structure based on the normal scenario EBIT.
f) Calculate the EBIT which is called the “point of
indifference” to help shareholders decide whether or not to change
the financial structure.