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Reliable Gearing currently is all-equity-financed. It has 18,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The

Reliable Gearing currently is all-equity-financed. It has 18,000 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 $340,000 with the proceeds used to buy back stock. The high-debt plan would exchange $500,000 of debt for equity. The debt will pay an interest rate of 10.8%. 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 $130,000 or $190,000, 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
$130,000 $ $
$190,000
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?
No
Yes
c.

Suppose that EBIT is $194,400. What is EPS under each financing mix? (Round your answers to 2 decimal places.)

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

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