Company X is currently 100% equity financed. It has 10,000 shares outstanding, and their market price is currently $100/share. The firm is considering two different recapitalization plans. In one plan, it would issue $200,000 in debt and use the proceeds to repurchase shares. In the other plan, it would issue $400,000 in debt and use the proceeds to repurchase shares. The debt in either scenario pays 10% interest. The firm pays no taxes.

a. What would the debt-to-equity ratio be after each possible restructuring?

b. If earnings before interest and tax (EBIT) will be either $90,000 or $130,000 (depending on whether things go well or poorly), what would the earnings per share (EPS) for both possible values of EBIT be under the two restructuring plans?

c. If both scenarios (good and bad outcomes) are equally likely, what is expected EPS under each restructuring plan? Given your findings about the expected EPS, can you say that the high-debt plan is preferable for shareholders? Explain.