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Question: Reliable Gearing currently is all-equity-financed. It has 12,000 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 $220,000 with the proceeds used to buy back stock. The high-debt plan would exchange $420,000 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 if it borrows $220,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If earnings before interest and tax (EBIT) are $130,000, what will be earnings per share (EPS) if Reliable borrows $220,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What will EPS be if it borrows $420,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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