Garson Corp. is looking at two possible capital structures. Currently the firm is an all-equity firm with $1.2 million dollars in assets and
200000 shares outstanding. The market value of each share of stock is $6.00. The CEO of Garson is thinking of leveraging the firm by selling $600000 of debt
financing and retiring 100000 shares leaving 100000 outstanding. The cost of debt is 10% annually and the current corporate tax rate for Garson is 30%. If
the CEO believes that Garson will earn $100000 per year before interest and taxes should she leverage the firm? Explain.
Answer Hint: Find the EPS under the two financing structures with an EBIT of $100000: