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Faelis Limited is an all-equity publicly listed firm with 500,000 shares currently on issue trading...

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Accounting

Faelis Limited is an all-equity publicly listed firm with 500,000 shares currently on issue trading at $10 per share and is expected to generate $500,000 in EBIT p.a. in perpetuity. They are considering immediately repurchasing 20% of their equity at the current market price and replacing this with debt with an interest cost of 5% per annum. Assume that Faelis Limited operate in a perfect capital market with no taxes, information costs,

15. For what value of EBIT will ROE be unaffected by Faelis Ltds decision to repurchase shares? [show all workings including the value of ROE that is the same under both structures] [6 marks]

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