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Problem 14-1 The Connecticut Computer Company has the selected financial results shown below. 20% Debt 40% Debt 75% Debt Debt $16000 Equity 64000 Total Capital $80000 12800 $12800 2400 Shares@ $5 EBIT Interest (15%) EBT Tax (40%) Net Income $10400 4160 $6240 ROE EPS The company is considering a capital restructuring to increase leverage from its present level of 20% of capital. a. Calculate Connecticut's ROE and EPS under its current capital structure. b. Restate the financial statement line items shown, the number of shares outstanding, ROE, and EPS if Connecticut borrows money and uses it to retire stock until its capital structure is 40% debt assuming EBIT remains unchanged and the stock continues to sell at its book value. (Develop the second column of the chart shown.) c. Recalculate the same figures assuming Connecticut continues to restructure until its capital structure is 75% debt. (Develop the third column of the chart.) Round ROE to one decimal place. Round EPS to two decimal places. Enter all amounts as positive numbers. 20% Debt 40% Debt 75% Debt Debt $ $16000 64000 Equity Total Capital $80000 $ Shares@ $5 12800 EBIT $12800 Interest (15%) 2400 EBT $10400 4 Tax (40%) 4160 | Net Income $6240 % % $ ROE EPS d. How is increasing leverage affecting financial performance? What overall effect might the changes have on the market price of Connecticut's stock? Why? (Words only. Hint: Consider the move from 20% to 40% and that from 40% to 75% separately.) The input in the box below will not be graded, but may be reviewed and considered by your instructor

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