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The management of ACM Corporation is evaluating a change in the capital structure of the firm to benefit from the effects of financial leverage

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January 9th, 2018

The management of ACM Corporation is evaluating a change in the capital structure of the firm to benefit from the effects of financial leverage. The firm currently has assets of $10,000,000financed entirely with 200,000 shares of common stock selling at $50 per share. The firm would alter its capital structure by borrowing funds at an interest rate of 12% and repurchasing shares at$50 per share. Management expects the firm to earn $1,500,000 next year before interest and taxes. The firm’s tax rate is 50%. What is the expected earnings per share (EPS) and return on equity (ROE) at next year’s expected level of EBIT if the firm remains 100% equity financed?

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