Problem:
As chief financial officer of the Magnificent Electronics Corporation (MEC), you are considering a recapitalization plan that would convert MEC from its current all-equity capital structure to one that includes substantial financial leverage. MEC now has 500,000 shares of common stock outstanding, which are selling for $60 each. You expect the firm's earnings before interest and taxes (EBIT) to be $2,400,000 per year, for the foreseeable future.
The recapitalization proposal is to issue $15,000,000 worth of long-term debt, at an interest rate of 6.0%, and then use the proceeds to repurchase 250,000 shares of common stock worth $15,000,000. Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for MEC shareholders under the current all-equity capital structure and also under the proposed recapitalization.
Please show all work.