CCT has 5 million shares on issue each with a market price of $2.50, they have no debt but are considering changing their capital structure by issuing $3 million of debt & using the entire proceeds to conduct a share buyback. Interest rate on debt is 10% p.a. & company tax rate is 30%.
(a) Calculate EPS for both the current and the proposed capital structures at a projected EBIT level of $6 million. Which capital structure is preferable if this is the expected level of EBIT?
(b) At what level of EBIT is CCT indifferent between the two capital structures under consideration?
(c) Graph the current and proposed capital structures.