Reliable Gearing currently is all-equity-financed. It has 24,000 shares of equit
ID: 2719399 • Letter: R
Question
Reliable Gearing currently is all-equity-financed. It has 24,000 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 $540,000 of debt for equity. The debt will pay an interest rate of 12%. The firm pays no taxes.
What will be the debt-to-equity ratio if it borrows $340,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
If earnings before interest and tax (EBIT) are $250,000, what will be earnings per share (EPS) if Reliable borrows $340,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What will EPS be if it borrows $540,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Reliable Gearing currently is all-equity-financed. It has 24,000 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 $540,000 of debt for equity. The debt will pay an interest rate of 12%. The firm pays no taxes.
Explanation / Answer
Relaible Gearing Details Current no of shares outstanding 24,000 Market Price per share 100 Market Value of Equity 2,400,000 a If borrowing is 340000 Debt 340,000 Shares bought back @100 3,400 Outstanding shares after buyback 20,600 Market value of outstanding shares 2,060,000 Debt Equity ratio = 16.5% b Interest rate on debt 12% EBIT = 250,000 Less Interest on debt 40,800 Net Income 209,200 Outstanding shares after buyback 20,600.00 EPS =209200/20600 10.16 So EPS = $ 10.16 c If borrowing is 540000 Debt 540,000 Shares bought back @100 5,400 Outstanding shares after buyback 18,600 EBIT = 250,000 Less Interest on debt 64,800 Net Income 185,200 Outstanding shares after buyback 18,600.00 EPS =185200/18600 9.96 So EPS = $ 9.96