Reliable Gearing currently is all-equity-financed. It has 18,000 shares of equit
ID: 2634610 • Letter: R
Question
Reliable Gearing currently is all-equity-financed. It has 18,000 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 $340,000 with the proceeds used to buy back stock. The high-debt plan would exchange $500,000 of debt for equity. The debt will pay an interest rate of 10.8%. The firm pays no taxes.
What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.)
If earnings before interest and tax (EBIT) will be either $130,000 or $190,000, 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
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.)
Suppose that EBIT is $194,400. What is EPS under each financing mix? (Round your answers to 2 decimal places.)
a.What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.)
Explanation / Answer
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%. The firm pays no taxes.
Market value of firm is $100