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Category > Accounting Posted 16 May 2017 My Price 5.00

Earnings and Leverage.

 

Earnings and Leverage. Reliable Gearing currently is all-equity financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy back Stock. The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10 percent. The firm pays 110 taxes.
a. What will be the debt-tax-equity ratio after each possible restructuring?
b. If earnings before interest and tax (EBIT) will be either $90,000 or $130.000. what will earnings per share be for each financing mix for both possible values of EBIT? If both scenarios are equally likely, what is expected (i.e. , average) EPS under each financing mix? Is the high-debt mix preferable?
c. Suppose that EBIT is $100,00. What is EPS under each financing mix? Why are they the same in this particular case?

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Alpha Geek
(8)
Status NEW Posted 16 May 2017 11:05 AM My Price 5.00

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file 1494933104-Answer.docx preview (257 words )
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