Appliances, Inc. has no debt outstanding, and its financial position is given by the following data:

Assets (market value = book value)		$5,000,000
EBIT		$800,000
Cost of equity		12%
Stock price		$10
Shares outstanding		500,000
Tax rate		25%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 20% debt based on market values, its cost of equity will increase to 13% to reflect the increased risk. Bonds can be sold at a cost of 6%. Appliance, Inc. is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

As a creditor, you are concerned about the companys ability to repay its debt and interest. What is the new times interest earned?

a. 11.58x

b. 12.24x

c. 11.32x

d. 12.56x

PLEASE SHOW ALL WORK