Business, 09.06.2020 19:57 genyjoannerubiera

Reliable Gearing currently is all-equity-financed. It has 17,000 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 $270,000 with the proceeds used to buy back stock. The high-debt plan would exchange $470,000 of debt for equity. The debt will pay an interest rate of 11%. The firm pays no taxes. Required:
a. What will be the debt-to-equity ratio if it borrows $220,000?
b. If earnings before interest and tax (EBIT) are $130,000, what will be earnings per share (EPS) if Reliable borrows $220,000?
c. What will EPS be if it borrows $420,000?

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Answer from: sugar1014

a. 0.15

b. $7.15 per share

c. $6.55

Explanation:

a. What will be the debt-to-equity ratio if it borrows $220,000?

Market value of equity = 17,000 * $100 = $1,700,000

Since the proceeds of a debt issue of $270,000 is used to buy back stock, we have:

Remaining market value of equity = $1,700,000 - $220,000 = $1,480,000

Therefore,

Debt-to-equity ratio = Debt / Remaining market value of equity = $220,000 / $1,480,000 = 0.15.

b. If earnings before interest and tax (EBIT) are $130,000, what will be earnings per share (EPS) if Reliable borrows $220,000?

Remaining number of shares = Remaining market value of equity / Market price per share = $1,480,000 / $100 = 14,800 shares

Interest on debt = $220,000 * 11% = $24,200

Tax = $0

Earning after interest and tax = EBIT - Interest on debt - Tax = $130,000 - $24,200 - $0 = $105,800

EPS = Earning after interest and tax / Remaining number of shares = $105,800 / 14,800 = $7.15 per share

c. What will EPS be if it borrows $420,000?

Remaining number of shares = ($1,700,000 - $420,000) / $100 = 12,800 shares

Interest on debt = $420,00 * 11% = $46,200

Tax = $0

Earning after interest and tax = EBIT - Interest on debt - Tax = $130,000 - $46,200 - $0 = $83,800

EPS = Earning after interest and tax / Remaining number of shares = $83,800 / 12,800 = $6.55 per share

Answer from: Quest

almost done 23 out of 25

Answer from: Quest

anyone below or above ambitious can tell you. so crowns mean brainliest. getting brainliest means your answer needs a good explanation and the person asking the question can understand your answer easily. so say there's a multiple choice question. you don't just want to say your answer is a, hope it . provide evidence and reasoning so that they know that that is the correct answer. a good explanation should have evidence, good reasoning, and your opinion on why you picked that. you don't want to look up their question on the internet and see if you can answer it. pick questions that you 100% know the answer to, so than that way you can provide a better explanation.

best of luck,

the divergent

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