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Question: Reliable Gearing currently is all-equity-financed. It has 26,000 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 $360,000 with the proceeds used to buy back stock. The high-debt plan would exchange $560,000 of debt for equity. The debt will pay an interest rate of 11%. The firm pays no taxes.

a. What will be the debt-to-equity ratio if it borrows $360,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Debt-to-equity ratio

b. If earnings before interest and tax (EBIT) are $270,000, what will be earnings per share (EPS) if Reliable borrows $360,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

EPS $

c. What will EPS be if it borrows $560,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

EPS $

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Basic Finance, Finance

Category:- Basic Finance
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