River Cruises is all-equity-financed.

Current Data

Number of shares 100,000

Price per share $ 10

Market value of shares $ 1,000,000

Outcomes

State of the Economy

Slump Normal Boom

Profits before interest $ 75,250 $ 125,500 $ 187,000

Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.)

Data

Number of shares

price per share $10

market value of shares

market value of debt

Outcomes

State of the economy

Slump Normal Boom

profit before interest $75,250 $125,000 $187,000

interest

equity earnings

Earnings per share

Return on shares %

Expected Outcome

2) River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $210,000 of debt at an interest rate of 10% and use the proceeds to repurchase 21,000 shares at $10 per share. Profits before interest are expected to be $121,000.

a. What is the ratio of price to expected earnings for River Cruises before it borrows the $210,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.)