Solutions to Chapter 1

f. Suppose total equity before the refinancing was $1,000. Then expected earnings were 10% of $1000, or $100. After the refinancing, there will be $500 of debt and $500 of equity, so interest expense will be $25. Therefore, earnings fall from $100 to $75, but the number of shares is now only half as large. Therefore, EPS increases by 50%: ................
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