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? (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? (Round your answer to 2 decimal places.) EPS c. What will EPS be if it borrows $580,000? (Round your answer to 2 decimal places.) EPS Problem 16-1 Debt Irrelevance (L01) State whether the following statements are true or false. MM's leverage-irrelevance proposition says: b. In the absence of taxes, the value of the firm does not depend on the fraction of debt versus equity financing As financial leverage increases, the value of the firm increases by just enough to offset the additional financial risk absorbed by equity C. The cost of equity increases with financial leverage only when the risk of financial distress is high d. If the firm pays no taxes, the weighted average cost of capital does not depend on the debt ratio. Problem 16-25 Financial Distress (L03) State whether the following statements are true or false. a If the probability of default is high, managers and stockholders will be tempted to take on excessively risky projects If the probability of default is high, stockholders may refuse to contribute equity even if the firm has safe, positive-NPV opportunities. When a company borrows, the expected costs of bankruptcy come out of the lenders' pockets and do not affect the market value of the shares C. Problem 16-35 Financial Slack (L04) State whether the following statements are true or false. a. Financial slack means having cash in the bank or ready access to the debt markets. b. Financial slack is most valuable to firms with few investment opportunities. C. Managers with excessive financial slack may be tempted to spend it on poor investments