Use this data for problems 8 & 9.

Rising Tide, Inc. has no debt outstanding, and its financial position is given by the following data:

Assets (market value = book value)$6,500,000

EBIT$765,000

Cost of equity8%

Stock price$16

Shares outstanding406,250

Tax rate35%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 20% debt based on market values, its cost of equity will increase to 9% to reflect the increased risk. Bonds can be sold at a cost of 5%. Rising Tide is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

8. If the company does the proposed leveraged recapitalization, what will be the new earnings per share?

9. As a creditor, you are concerned about the companys ability to repay its debt and interest. What is the new times interest earned?