Reliable Gearing currently is all -equity-financed. It has 10,000 shares of equity outstanding, selling at $10 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%. EBIT is is $110,000. Assume the cost of capital of Reliable Gearing is 10% when it has zero debt.

a. What would be the cost of capital after the debt issue in each case? Assuming the company pays a 50% tax rate

b. What was ROE before the debt issue and after the high-debt plan issue? Use Dupont analysis

c. Could you assess if the company created value by following the high-debt plan?