# Suppose that EBIT is \$117,600. What is EPS under each financing mix?

05 / 03 / 2018 Assignment

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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

c.
Suppose that EBIT is \$117,600. What is EPS under each financing mix? (Round your answers to 2 decimal places.)

Earnings Per Share
Low-debt plan \$
High-debt plan

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