Reliable Gearing currently is all-equity-financed. It has 23,000 shares of equit
ID: 2762815 • Letter: R
Question
Reliable Gearing currently is all-equity-financed. It has 23,000 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 $330,000 with the proceeds used to buy back stock. The high-debt plan would exchange $530,000 of debt for equity. The debt will pay an interest rate of 11%. The firm pays no taxes.
a. What will be the debt-to-equity ratio if it borrows $330,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Debt-to-equity ratio
b. If earnings before interest and tax (EBIT) are $240,000, what will be earnings per share (EPS) if Reliable borrows $330,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) EPS $
c. What will EPS be if it borrows $530,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) EPS $
Explanation / Answer
(a) Number of shares 23000 Share Price 100 Total Share Value=23000*100 2300000 If debt of 330000 is taken and equivalent equity is retired, balance equity=2300000-330000 1970000 Debt/Equity=330000/1970000 0.168 (b) EBIT 240000 Interest=0.11*330000 36300 Earning after interest and zero taxes=240000-36300 203700 Shares =1970000/100 19700 Earning per share=203700/19700 10.34 © If he borrows 530000, the equity left =2300000-530000 1770000 Number of shares=1770000/100 17700 EBIT 240000 Interest=0.11*530000 58300 Earning after interest and zero taxes=240000-58300 181700 Earning per share=181700/17700 10.27