Reliable Gearing currently is all-equity-financed. It has 5,000 shares of equity outstanding, selling at $70 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $77,000 with the proceeds used to buy back stock. The high-debt plan would exchange $140,000 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 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 $20,000 or $450,000, what will earnings per share be for each financing mix for both possible values of EBIT? (Round your answers to the nearest cent.) EPS ($20,000; low-debt plan) EPS ($450,000; low-debt plan) EPS ($20,000; high-debt plan) EPS ($450,000; high-debt plan) 62. 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? c. Suppose that EBIT is $35,000. What is EPS under each financing mix? (Round your answers to the nearest cent.) EPS (low-debt plan) EPS (high-debt plan) Reliable Gearing currently is all-equity-financed. It has 5,000 shares of equity outstanding, selling at $70 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $77,000 with the proceeds used to buy back stock. The high-debt plan would exchange $140,000 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 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 $20,000 or $450,000, what will earnings per share be for each financing mix for both possible values of EBIT? (Round your answers to the nearest cent.) EPS ($20,000; low-debt plan) EPS ($450,000; low-debt plan) EPS ($20,000; high-debt plan) EPS ($450,000; high-debt plan) 62. 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? c. Suppose that EBIT is $35,000. What is EPS under each financing mix? (Round your answers to the nearest cent.) EPS (low-debt plan) EPS (high-debt plan)
