Reliable Gearing currently is all-equity-financed. It has 12,000 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 $250,000 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 10.2%. The firm pays no taxes.
What will be the debt-to-equity ratio after each contemplated restructuring?
If earnings before interest and tax (EBIT) will be either $100,000 or $145,000, what will be earnings per share for each financing mix for both possible values of EBIT?