Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 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%. The firm pays no taxes.

a.	What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.)

	Debt-to-Equity Ratio
Low-debt plan
High-debt plan

b-1.	If earnings before interest and tax (EBIT) will be either $90,000 or $130,000, what will be earnings per share for each financing mix for both possible values of EBIT? (Round your answers to 2 decimal places.)

	Earnings Per Share
EBIT	Low-Debt Plan	High-Debt Plan
$90,000	$	$
$130,000

b-2.	If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Earnings Per Share
Low-debt plan	$
High-debt plan

b-3.

Is the high-debt mix preferable?

	Yes
	No

c.	Suppose that EBIT is $100,000. What is EPS under each financing mix?

	Earnings Per Share
Low-debt plan	$
High-debt plan