borrowing rate of 10% and use the proceeds to repurchase 50 shares. To support his proposal Mr. Modigliani has analyzed the situation under the various different assumptions about operating income. The results are as follows t a Number of shares Market value of debt $1000 utcome Sit 2 Sit 3 (Expected Outcome) Operating income 100 250 300 Interest S 100 100 Equity Earnings S 150 200 EPS S Return on equity 15 Return on debt 10 10 10 We can plot this data on the following diagram 1010 borrowing rate of 10% and use the proceeds to repurchase 50 shares. To support his proposal Mr. Modigliani has analyzed the situation under the various different assumptions about operating income. The results are as follows: Data Number of shares 50 Market value of debt $1000 rD = 10% Possible Outcomes Sit 1 Sit 2 Sit 3 (Expected Outcome) Operating income $ 100 250 300 Interest $ 100 100 100 Equity Earnings $ 0 150 200 EPS $ 0 3 4 Return on equity % 0 15 20 Return on debt % 10 10 10 We can plot this data on the following diagram: