Question
Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $106 a share. The firm is considering a capital restructuring. The
Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $106 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $212,000 with the proceeds used to buy back stock. The high-debt plan would exchange $424,000 of debt for equity. The debt will pay an interest rate of 9%. The firm pays no taxes. a. What will be the debt-to-equity ratio if it borrows $212,000? (Round your answer to 2 decimal places.) b. If earnings before interest and tax (EBIT) are $135,000, what will be earnings per share (EPS) if Reliable borrows $212,000? (Round your answer to 2 decimal places.) c. What will EPS be if it borrows $424,000? (Round your answer to 2 decimal places.)
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