If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix? (Do not round intermediate calculations.

If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix? (Do not round intermediate calculations.

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 $210,000 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 9.8%. 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 $65,000 or $185,000, 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
$65,000 $ $
$185,000

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?

Yes
No


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