Reliable Gearing currently is all-equity-financed. It has 28,000 shares of equit
ID: 2716780 • Letter: R
Question
Reliable Gearing currently is all-equity-financed. It has 28,000 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 $380,000 with the proceeds used to buy back stock. The high-debt plan would exchange $580,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes.
What will be the debt-to-equity ratio if it borrows $380,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
If earnings before interest and tax (EBIT) are $290,000, what will be earnings per share (EPS) if Reliable borrows $380,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What will EPS be if it borrows $580,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Reliable Gearing currently is all-equity-financed. It has 28,000 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 $380,000 with the proceeds used to buy back stock. The high-debt plan would exchange $580,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes.
Explanation / Answer
1) Debt Equity ratio=380,000/2,800,000=0.14
2) EBT=EBIT-I=$290,000-$380,000*10%
=$252,000
Eps=$252,000/28000=$9
3)EBT=$290,000-$58000=$232,000
EPS=$232,000/28,000=$8.29