Business, 17.06.2020 00:57 jackh0406

Reliable Gearing currently is all-equity-financed. It has 23,000 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 $330,000 with the proceeds used to buy back stock. The high-debt plan would exchange $530,000 of debt for equity. The debt will pay an interest rate of 11%. The firm pays no taxes. a. What will be the debt-to-equity ratio if it borrows $330,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Debt-to-equity ratiob. If earnings before interest and tax (EBIT) are $240,000, what will be earnings per share (EPS) if Reliable borrows $330,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) EPS $c. What will EPS be if it borrows $530,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) EPS $

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Answer from: cannonkd

a. The debt-to-equity ratio would be 0.168

b. The earnings per share (EPS) if Reliable borrows $330,000 would be of $10.34 per share

c. The earnings per share (EPS) if Reliable borrows $530,000 would be of $10.27 per share

Explanation:

a. According to the given data we have the following:

Number of shares=23,000

Share Price=$100

Hence, Total Share Value=23,000*$100=$2,300,000

If debt of $330,000 is taken and equivalent equity is retired, balance equity=$2,300,000-$33,0000=$1,970,000

Therefore, the Debt/Equity ratio would be as follows:

Debt/Equity ratio=$330,000/$1,970,000

Debt/Equity ratio=0.168

b. According to the given data we have the following:

EBIT=$240,000

Interest=0.11*$330,000=$36,300

Hence, Earning after interest and zero taxes=$240,000-$36,300=$203,700

Shares =1,970,000/100=19,700

Therefore, The Earning per share=$203,700/19,700=$10.34

c. According to the given data If he borrows 530000, the equity left =$2,300,000-$530,000=$1,770,000

Number of shares=1,770,000/100=17,700

EBIT=$240,000

Interest=0.11*530,000=$58,300

Hence, Earning after interest and zero taxes=$240.000-$58,300=$181,700

Therefore the Earning per share=$181,700/17,700=$10.27

Answer from: Quest

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Answer from: Quest

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this happen because of several things, such as:

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- rich people tend to have more capital in their disposal. this would benefit them in business since it is far easier for them to fund their business operation compared to poor people.

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