Compare current-previous structures impact on shareholders


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Currently a firm has $1 million in 10% debt. The firm also has 50,000 shares outstanding that sell for $40 each. The firm used the $1.0 million to repurchase stock, as they previously were an all equity firm. Three states of the economy are possible: a slump under which the firm would have operating income of $150,000, a normal state under which the firm will earn $420,000, and a boom under which the firm will earn $600,000. The firm pays 30% in taxes. Compare and contrast the current and previous structures for their impact on shareholders.

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Finance Basics: Compare current-previous structures impact on shareholders
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