Answer Happy

Firestarter 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 Firestarter is thinking of leveraging the firm by selling $300,000 of debt financing and retiring 25,000 shares, leaving 75,000 shares outstanding. The cost of debt is 8% annually, and the current corporate tax rate for Firestarter is 30%. The CEO believes that Firestarter will earn $80,000 per year before interest and taxes. Which of the statements below is TRUE? The leveraged EPS is $0.56. Shareholders will be worse off by almost $0.04 per share under a firm with $300,000 in debt financing versus a firm that is all-equity. All answers are correct. All-equity EPS is $0.523.