reliable Company 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 $500,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. Required: (a.) What will be the debt-to-equity ratio and number of shares outstanding after each completed restructuring? (b.) If earnings before interest and tax (EBIT) are $150,000, what will be earnings per share (EPS) if it follows low debt plan? What will EPS be if it follows high debt plan? (c.) Which plan would you recommend? Why?
Unreliable Company 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 $500,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes.
Required:
(a.) What will be the debt-to-equity ratio and number of shares outstanding after each completed restructuring?
(b.) If earnings before interest and tax (EBIT) are $150,000, what will be earnings per share (EPS) if it follows low debt plan? What will EPS be if it follows high debt plan?
(c.) Which plan would you recommend? Why?
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