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ID: 2789538 • Letter: C
Question
Connect 90% Q Search Check my work mode: This shows what is correct or incorrect for the work you have completed so far. It does not Indicate complet Reliable Gearing currently is all-equity-financed. It has 22,000 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 $320,000 with the proceeds used to buy back stock The high-debt plan would exchange $520,000 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 $320,000? (Round your answer to 2 decimal places.) Answer is complete and correct. 0.17 ratio b. If earnings before interest and tax (EBIT) are $230,000, what wil be carnings per share (EPS) if Reliable borrows $320,0007 (Round your answer to 2 decimal places.) O Answer is not comp te. c. What will EPS be if it borrows $520,000? (Round your answer to 2 decimal places.) Answer is not complete. EPS Prev 1 of 5Explanation / Answer
b) Total Market value of firm = $100 per share x 22000 shares = $2,200,000
Value of debt to be issued = $320,000
Shares to be repurchased = $320,000 / $100 per share = 3200 shares
Remaining shares = 22000 - 3200 = 18,800 shares
EBIT = $230,000
Earnings available to equity stockholders' = EBIT - Interest = $230000 - $320000 x 10% = $198000
EPS = Earnings available to equity stockholders' / No. of shares = $198000 / 18800 = $10.53 per share
c) Amount of debt to be issued = $520,000
No. of Shares to be repurchased = $520,000 / $100 per share = 5200 shares
Remaining no. of shares = 22000 - 5200 = 16800 shares
Earnings available to equity stockholders' = EBIT - Interest = $230000 - $520000 x 10% = $178000
EPS = Earnings available to equity stockholders' / No. of shares outstanding = $178000 / 16800 = $10.60 per share
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