Fred and Co is considering altering its capital structure by borrowing $10,000 and using the funds to buy back some stock. Using the following information, answer the questions.
Current capital structure
Assets: $25,000
Debt: none
Equity: $25,000
Share price: $35.00
Shares Outstanding: 500
Coupon rate: N/A
Proposed Capital Structure
Assets: $25,000
Debt: $10,000
Equity: $15,000
Share price: $35
Shares outstanding: ?
Coupon rate: 10%
Earnings before interest and taxes:
Recession: $2000
Expected: $3000
Expansion: $4000
A) How many shares will be outstanding under the proposed capital structure?
B) For each of the three EBIT scenarios calculate the Earnings Per Share and Return on Equity for the current capital structure and the proposed capital structure