13.1 EBIT and EPS. Suppose the GNR Corporation has decided in favor of a
capital restructuring that involves increasing its existing $5 million in debt to
$25 million. The interest rate on the debt is 12 percent and is not expected to
change. The firm currently has one million shares outstanding, and the price per
share is $40. If the restructuring is expected to increase the ROE, what is the
minimum level for EBIT that GNR's management must be expecting? Ignore
taxes in your answer.
13.2 M&M Proposition II (no taxes). The Pro Bono Corporation has a WACC of
20 percent. Its cost of debt is 12 percent. If Pro Bono's debt-equity ratio is 2, what
is its cost of equity capital? Ignore taxes in your answer.
13.3 M&M Proposition I (with corporate taxes). Suppose TransGlobal Co.
currently has no debt and its equity is worth $20,000. If the corporate tax rate is
30 percent, what will the value of the firm be if TransGlobal borrows $6,000 and
uses the proceeds to buy up stock?