Balfour Corp has the following operating results and capital structure ($000). ,,Revenue $6,000 Debt $1,200,cost/expense 4,500 Equity 8,800,EBIT 1,500 total 10,000,,The firm is contemplating a capital restructuring to 60% debt. Its stock is currently selling for book value at $25 per share. The interest rate is 9%, and combined state and federal taxes are 42%. , a. Calculate EPS under the current and proposed capital structures. , b. Calculate the DFL under both structures., c. Use the DFLs to forecast the resulting EPS under each structure if operating profit falls off by 5%, 10%, or 25%. , d. Comment on the desirability of the proposed structure versus the current one as a function of the volatility of the business. , e. Is stock price likely to be increased by a change to the proposed capital structure? Discuss briefly. ,
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