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Problem 16-4 Leverage and P/E Ratios (LO1) River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $260,000 of debt at an interest
Problem 16-4 Leverage and P/E Ratios (LO1) River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $260,000 of debt at an interest rate of 12% and use the proceeds to repurchase 26,000 shares at $10 per share. Profits before interest are expected to be $126,000. a. What is the ratio of price to expected earnings for River Cruises before it borrows the $260,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio
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