Leverage and Earnings. Reliable Gearing currently is all-equity-financed. It has 10,000 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 $200,000 with the proceeds used to buy back stock. The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. (LO16-1) a. What will be the debt-to-equity ratio if it borrows $200,000? b. If earnings before interest and tax (EBIT) are $110,000, what will be earnings per share (EPS) if Reliable borrows $200,000? c. What will EPS be if it borrows $400,000?
Leverage and Earnings. Reliable Gearing currently is all-equity-financed. It has 10,000 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 $200,000 with the proceeds used to buy back stock. The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. (LO16-1) a. What will be the debt-to-equity ratio if it borrows $200,000? b. If earnings before interest and tax (EBIT) are $110,000, what will be earnings per share (EPS) if Reliable borrows $200,000? c. What will EPS be if it borrows $400,000?
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 24P
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Leverage and Earnings. Reliable Gearing currently is all-equity-financed. It has 10,000 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 $200,000 with the proceeds used to buy back stock.
The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest
rate of 10%. The firm pays no taxes. (LO16-1)
a. What will be the debt-to-equity ratio if it borrows $200,000?
b. If earnings before interest and tax (EBIT) are $110,000, what will be earnings per share
(EPS) if Reliable borrows $200,000?
c. What will EPS be if it borrows $400,000?
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