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    Recapitalization Plan for All-Star Production Corporation

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    The All-Star Production Corporation (APC) is considering recapitalization plan that would convert APC from its current all-equity capital structure to one including some financial leverage. APC now has 10,000,000 shares of common stock outstanding, which are selling for $40.00 each and you expect the firms EBIT to be $50,000,000 per year for the foreseeable future. The recapitalization proposal is to issue $100,000,000 woth of long-term debt at an interest rate of 6.50 percent, and use the proceeds to repurchase as many shares as possible at a price of $40.00 per share. Assume there are no market frictions such as corporate or personal income taxes. Calculate the expected return on equity for APC shareholders, under both the current all-equity capital structure and under the recapitalization plan.

    a. Calculate the number of shares outstanding, the per-share price, and the debt-to-equity ratio for APC if the proposed recapitalization is adopted.
    b. Calculate the earnings per share (EPS) and the return on equity for APC shareholders, under both the current all-equity capitalization and the proposed mixed debt/equity capital structure.
    c. Calculate the breakeven level of EBIT, where earnings per share for APC stockholders are the same, under the current and proposed capital structures.
    d. At what level of EBIT will APC shareholders earn zero EPS, under the current and proposed capital structures.

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    Solution Preview

    Please see attached Excel file for the full solution and proper formatting.

    Proposed Capital Structure Current Capital Structure
    Shares Outstanding 7,500,000.00
    Per-Share Price ...

    Solution Summary

    The shares for All-Star Production Corporation are analyzed.