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Reliable Gearing currently is all-equity-financed. It has 16,000 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 $350,000 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 10.6%. The firm pays no taxes. |
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| a. |
What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.) |
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| Â | Debt-to-Equity Ratio |
| Low-debt plan | Â |
| High-debt plan | Â |
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| b-1. |
If earnings before interest and tax (EBIT) will be either $120,000 or $175,000, what will be earnings per share for each financing mix for both possible values of EBIT? (Round your answers to 2 decimal places.) |
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| Â |
Earnings Per Share |
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| EBIT | Low-Debt Plan | High-Debt Plan |
| $120,000 | $ | $ |
| $175,000 | Â | Â |
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| b-2. |
If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix?(Do not round intermediate calculations. Round your answers to 2 decimal places.) |
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| Â | Earnings Per Share |
| Low-debt plan | $ |
| High-debt plan | Â |
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| b-3. | Is the high-debt mix preferable? | ||||
| Â | Â | ||||
| Â |
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| c. |
Suppose that EBIT is $169,600. What is EPS under each financing mix? (Round your answers to 2 decimal places.) |
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| Â | Earnings Per Share |
| Low-debt plan | $ |
| High-debt plan | Â |