Reliable Gearing currently is all-equity-financed. It has 5,000 shares of equity outstanding, selling at $90 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $81,000 with the proceeds used to buy back stock. The high-debt plan would exchange $180,000 of debt for equity. The debt will pay an interest rate of 12%. The firm pays no taxes.

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

D/E (low)
D/E (high)

b1. If earnings before interest and tax (EBIT) will be either $35,000 or $520,000, what will earnings per share be for each financing mix for both possible values of EBIT? (Round your answers to the nearest cent.)

EPS ($35,000; low-debt plan)
EPS ($520,000; low-debt plan)
EPS ($35,000; high-debt plan)
EPS ($520,000; high-debt plan)

b2. If both scenarios are equally likely, what is expected (that is, average) EPS under each financing mix? (Round your answers to the nearest cent.)

Expected EPS (low-debt plan)
Expected EPS (high-debt plan)

b3. Is the high-debt mix preferable?

It is undoubtedly preferable/It is not necessary preferable

c. Suppose that EBIT is $54,000. What is EPS under each financing mix? (Round your answers to the nearest cent.)

EPS (low-debt plan)
EPS (high-debt plan)