Question
Reliable Gearing currently is all-equity-financed. It has 28,000 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 28,000 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 $380,000 with the proceeds used to buy back stock. The high-debt plan would exchange $580,000 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 if it borrows $380,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Debt-to-equity ratio |
b. | If earnings before interest and tax (EBIT) are $290,000, what will be earnings per share (EPS) if Reliable borrows $380,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
EPS | $ |
c. | What will EPS be if it borrows $580,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
EPS | $ |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started