Reliable Gearing currently is all-equity-financed. It has 18,000 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 $340,000 with the proceeds used to buy back stock. The high-debt plan would exchange $500,000 of debt for equity. The debt will pay an interest rate of 10.8%. The firm pays no taxes.
a. What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.)
Debt-to-Equity Ratio Low-debt plan High-debt plan
b-1. If earnings before interest and tax (EBIT) will be either $130,000 or $190,000, what will be earnings per share for each financing mix for both possible values of EBIT? (Round your answers to 2 decimal places.)
Earnings Per Share
EBIT Low-Debt Plan High-Debt Plan $130,000 $ $ $190,000
b-2. If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Earnings Per Share Low-debt plan $ High-debt plan
b-3. Is the high-debt mix preferable? No Yes
c. Suppose that EBIT is $194,400. What is EPS under each financing mix? (Round your answers to 2 decimal places.)
Earnings Per Share Low-debt plan $ High-debt plan
Reliable Gearing currently is all-equity-financed. It has 18,000 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 $340,000 with the proceeds used to buy back stock. The high-debt plan would exchange $500,000 of debt for equity. The debt will pay an interest rate of 10.8%. The firm pays no taxes.
| a. | What will be the debt-to-equity ratio after each contemplated restructuring? (Round your answers to 2 decimal places.) |
| Debt-to-Equity Ratio | |
| Low-debt plan | |
| High-debt plan | |
| b-1. | If earnings before interest and tax (EBIT) will be either $130,000 or $190,000, what will be earnings per share for each financing mix for both possible values of EBIT? (Round your answers to 2 decimal places.) |
| Earnings Per Share | ||
| EBIT | Low-Debt Plan | High-Debt Plan |
| $130,000 | $ | $ |
| $190,000 | ||
| b-2. | If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| Earnings Per Share | |
| Low-debt plan | $ |
| High-debt plan | |
| b-3. | Is the high-debt mix preferable? | ||||
|
| c. | Suppose that EBIT is $194,400. What is EPS under each financing mix? (Round your answers to 2 decimal places.) |
| Earnings Per Share | |
| Low-debt plan | $ |
| High-debt plan |
Related questions
Reliable Gearing currently is all-equity-financed. It has 19,000 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 $290,000 with the proceeds used to buy back stock. The high-debt plan would exchange $490,000 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 if it borrows $290,000?
| . | If earnings before interest and tax (EBIT) are $200,000, what will be earnings per share (EPS) if Reliable borrows $290,000?
|
Destin Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $80,000 in debt. Plan II would result in 7,500 shares of stock and $120,000 in debt. The interest rate on the debt is 8 percent.
| a. | Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $50,000. The all-equity plan would result in 12,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16)) |
| EPS | ||
| Plan I | $ | |
| Plan II | $ | |
| All equity | $ | |
| | ||
| b. | In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? |
| EBIT | ||
| Plan I and all-equity | $ | |
| Plan II and all-equity | $ | |
| | ||
| c. | Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? |
| EBIT | $ |
| d-1 | Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Round your answers to 2 decimal places. (e.g., 32.16)) |
| EPS | ||
| Plan I | $ | |
| Plan II | $ | |
| All equity | $ | |
| | ||
| d-2 | Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? |
| EBIT | ||
| Plan I and all-equity | $ | |
| Plan II and all-equity | $ | |
| | ||
| d-3 | Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? |
| EBIT | $ |
