Assume an Initial Scenario Where a Levered Firm Has Total

Assume an initial scenario where a levered firm has total assets of $8,000,earnings before interest and taxes of $600,400 shares of stock outstanding,a debt-equity ratio of .25,and a cost of debt of 7 percent.Now assume a second scenario where the firm changes to an all-equity structure by issuing new shares to pay off debt while a shareholder holding 10 percent of the stock borrows funds at 7 percent and uses homemade leverage to offset the firm's change in capital structure.Ignore taxes.What are the net earnings for this shareholder under the initial scenario? Under the second scenario?

A) $90.00; $90.00
B) $90.00; $112.50
C) $48.80; $38.80
D) $48.80; $48.80
E) $45.00; $48.80

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