Answer Happy

Firestopper Corp. is a small company looking at two possible capital structures. Currently, the firm is an all-equity firm with $1,200,000 in assets and 100,000 shares outstanding. The 'market value of each share is $12.00. The CEO of Firestopper is thinking of leveraging the firm by selling $600,000 of debt financing and retiring 50,000 shares, leaving 50,000 shares outstanding. The cost of debt is 5% annually, and the current corporate tax rate for Firestopper is 35%. The CEO believes that Firestopper will earn $100,000 per year before interest and taxes. Which of the statements below is TRUE? Shareholders will be better off by $0.26 per share under a firm with $600,000 in debt financing versus a firm that is all-equity. All-equity EPS is $0.65. All answers are correct. The leveraged EPS is $0.91.