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Category > Business & Finance Posted 30 Apr 2017 My Price 5.00

Reliable Gearing currently

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.

 

a.

What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.)

 

  Debt-to-Equity Ratio
Low-debt plan  
High-debt plan  

 

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.)

 

 

Earnings Per Share
EBIT Low-Debt Plan High-Debt Plan
$120,000 $ $
$175,000    

 

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.)

 

  Earnings Per Share
Low-debt plan $
High-debt plan  

 

b-3. Is the high-debt mix preferable?
   
 
  No
  Yes

 

c.

Suppose that EBIT is $169,600. What is EPS under each financing mix? (Round your answers to 2 decimal places.)

 

  Earnings Per Share
Low-debt plan $
High-debt plan  
 

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Status NEW Posted 30 Apr 2017 01:04 PM My Price 5.00

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