1) What will be the debt-to-equity ratio if the firm undergoes the low-debt restructuring?

2) What are the expected earnings per share (EPS) under the low-debt plan?

3) What are the expected earnings per share (EPS) under the high-debt plan?

As before, your firm is currently 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. You have learned that earnings before interest and tax (EBIT) will be either $90,000 (low) or $130,000 (high). Assume that each case is equally likely