PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 17, Problem 4PS
Corporate leverage 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.
- 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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Leverage and Earnings. Reliable Gearing currently is all-equity-financed. It has 10,000 sharesof 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 interestrate 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?
Reliable Gearing currently is all-equity-financed. It has 27,000 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 $370,000 with the proceeds used to buy back stock. The high-debt plan would exchange $570,000 of debt for equity. The debt will pay an interest rate of 12%. The firm pays no taxes.
a. What will be the debt-to-equity ratio if it borrows $370,000? (Round your answer to 2 decimal places.)
b. If earnings before interest and tax (EBIT) are $280,000, what will be earnings per share (EPS) if Reliable borrows $370,000? (Round your answer to 2 decimal places.)
c. What will EPS be if it borrows $570,000? (Round your answer to 2 decimal places.)
Chapter 17 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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