ATH 150-01.A Chegg.com mhed 90% Search 14 Help Save & E Problem 16-8 Leverage an
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ATH 150-01.A Chegg.com mhed 90% Search 14 Help Save & E Problem 16-8 Leverage and Earnings (LO1) Reliabile Gearing currently is all-equlty fnanced. t has 22,000 shares of equity outstanding, selling at $100 a share. The firm is The high-debt plan would exchange $520,000 of debt for equity. The debt will pay an inberest rate of 10%. The firm pays no taxes a. What will be the debt-to-equity ratio if it borrows $320,000? (Round your answer to 2 decimal places 20 poinsconsidering a capital restructuring The low-debt plan calls for a debt issue of $320,000 with the proceeds used to buy back stock if Reilable borrows $3200007 (Round b. earnings before interest and tax Em are S 230,000, what wil be eamngs per share (EPS your answer to 2 decimal places C. What will EPS be f it borrows $520,000? (Round your answer to 2 decimal places 8 3 9Explanation / Answer
a.
Number of share = 22,000
Stock price = $100
Market value of equity = 22,000 × $100
= $2,200,000
Market Value of equity is $2,200,000.
Value of debt = $320,000
Debt Equity Ratio = $320,000 / $2,200,000
= 0.145
Debt Equity Ratio is 0.145.
b.
EBIT = $230,000
Value of debt = $320,000
Interest rate = 10%
Interest expenses = $320,000 × 10%
= $32,000
Net income = $230,000 - $32,000
= $198,000
Net income of company is $198,000.
Earnings per share = $198,000 / 22,000
= $9.00
Earnings per share is $9.00.
c.
EBIT = $230,000
Value of debt = $520,000
Interest rate = 10%
Interest expenses = $520,000 × 10%
= $52,000
Net income = $230,000 - $52,000
= $178,000
Net income of company is $178,000.
Earnings per share = $178,000 / 22,000
= $8.09
Earnings per share is $8.09.
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