Use the following information provided to answer Questions 49 to 51 Press Corporation is reviewing its capital structure. The company has no leverage and all the operating income is paid as dividends to the ordinary shareholders. There are currently 1000 shares outstanding and the price of each share is R10. The firm's Financial Manager has decided to lever up by issuing R5 000 worth of debt at an interest rate of 10 per cent, and use the proceeds to repurchase equity worth R5 000. It is assumed that the issue of debt does not affect the market value of debt, and that there are no taxes. 49. Assuming that the firm is all equity financed, calculate the earnings per share and return on shares if the operating income is R1 200: a. R1.20 and 12% b. R2.40 and 24% c. R0.70 and 7% d. R0.70 and 14% e. None of the above 50. Assuming that the firm is levered with R5000 worth of debt, and that an equal amount worth of shares have been repurchased, calculate the earnings per share if the operating income is R1 200. a. R1.20
b. R1.40 c. R0.70 d. R2.40 e. None of the above 51. Assuming an operating income of R1200, and using MM proposition II, calculate the firm's new cost of equity after issuing the new debt. a. 12% b. 10% c. 13% d. 14% e. None of the above