Question

Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $97 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $194,000 with the proceeds used to buy back stock. The high-debt plan would exchange $388,000 of debt for equity. The debt will pay an interest rate of 9%. The firm pays no taxes. a. What will be the debt-to-equity ratio if it borrows $194,000? (Round your answer to 2 decimal places.) Answer is complete and correct. Debt-to-equity ratio 0.25 b. If earnings before interest and tax (EBIT) are $103,000, what will be earnings per share (EPS) if Reliable borrows $194,000? (Round your answer to 2 decimal places.) * Answer is complete but not entirely correct. EPS $ 10.72 c. What will EPS be if it borrows $388,000? (Round your answer to 2 decimal places.)

Answer 1

There are 10,000 shores & selling at 97 per share market value of equit - 19000 * 97 :>) 9,20,000 Fisim is considering a capital restructuring @ low debt plow -issue of $ 1,94,000 withe se the proceeds used to buy - back the shores. Hight debt plan issue of $3,88,000 with the proceeds used to buy book the shores. debt will pay an interest gote of 9.4. and from pays no tartes Debt equieta tako if barness #1,9400 o =) Oeb! ), ) 1,94,000 egleit 970,000-1,94,000 - 10.25)

EBT = $ 103,000 and reliable boonrows $ 1,94,000. I so, using that proceeds to buy back the shorses Therefore no of somes buy back = 1,94,000 97 =) 2,000 stores. semaining no of shares a too short as -) 10,000 - 20000 8,000 shares so that EBQT = 1,03,000. = (17,460) (-) Enterest (1,94,00x9:/.] EBT TS 85,540 B (0) -) TO - PAT 85,540 Eps = O PAT no of shares = 85,540 - 10.6925 Round off to a decimaly a {10.69)

2 boonoay 3,8,00 $ : Therefore no of shones bought bock =) 3,88,000 97 -). 4,000 shares. kencining no. of shones =) 19000–41000 - 6,000 shares so, that E627 - 103,000 (-) interest - (34,920) (3, 88, ccox qv.] EBT = 68,080 U Tone = (0) - PAT 68,080 PAT EPS = no of stones 68,080 6,000 -) 11-34666666 Round off to 2 decimaly, a, (1.35