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Bazooka Corp

Finance

Bazooka Corp. is a small company looking at two possible capital structures. Currently, the firm is an all-equity firm with $900,000 in assets and 100,000 shares outstanding. The market value of each share is $9.00. The CEO of Bazooka is thinking of leveraging the firm by selling $270,000 of debt financing and retiring 30,000 shares, leaving 70,000 shares outstanding. The cost of debt is 6% annually, and the current corporate tax rate for Bazooka is 30%. The CEO believes that Firewall will earn $100,000 per year before interest and taxes. Which of the statements below is TRUE?

   

A) All-equity EPS is $0.70.
   

B) 30/70 debt-to-equity EPS is $0.838.
   

C) Shareholders will be better off by almost $0.14 per share under a firm with $270,000 in debt financing versus a firm that is all-equity.
   

D) Statements A, B, and C are all true.

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