A firm is all equity financed and it has 5,000 shares outstanding valued at 100 per share. The firm is considering a capital restructuring and it has two different options. A low debt plan that consists of an issue of 100.000 that will be used to repurchase own shares. A high debt plan that consists in an exchange of 200.000 of debt for shares. In both cases debt will pay an interest rate of 10%.

a. What is the debt ratio (debt / equity) in each of the restructuring options?

b. If EBIT is 45,000 or 65,000, what are the earnings per share ratio (EPS) for each of the financing combinations and for each of the possible EBIT values? If both scenarios have equal probabilities, what is the expected EPS for each of the financing options? Is the high debt option preferable?

c. Consider the EBIT is 50,000, what is the EPS for each of the financing combinations?