Currently a firm has $1 million in 10% debt. The firm also
has 50,000 shares outstanding that sell for $40 each. The firm used the $1.0
million to repurchase stock, as they previously were an all equity firm. 

Three
states of the economy are possible: a slump under which the firm would have
operating income of $150,000, a normal state under which the firm will earn
$420,000, and a boom under which the firm will earn $600,000. 

The firm pays 30%
in taxes. Compare and contrast the current and previous structures for their
impact on shareholders.