1. An unlevered firm with a market value of $1 million has 40,000 shares outstanding. The firm restructures itself by issuing 200 new par bonds with face value $1,000 and a 6% coupon. The firm uses the proceeds to repurchase outstanding stock. In considering the newly levered versus formerly unlevered firm, what is the breakeven EBIT? Ignore taxes.
2. What is the difference between operating leverage and financial leverage? Avoid formulas.