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RG is currently all equity financed. It has 10,000 shares of equity outstanding, selling at $100 share. The firm is considering capital restructuring. The low debt plan calls for debt issue of $200,000 with the proceeds used to buy back stock. The high-debt plan would exchange $400,000 of debt equity. The debt will pay an interest rate of 10 percent. The firm pays no taxes.
a. what will be the debt to equity ratio after each possible restructuringb. If the earnings before interest and tax (EBIT) will be either $90,000 or $130,000 what will be the earnings per share (EPS) for each financing mix for both possible values of ebit? If both scenarios are equally likely, what is the expected (i.e. average) EPS under each financing mix? Is the high debt mix preferable?c. Suppose the earnings before interest and taxes is $100,000. What is the EPS under each financing mix? Why are they the same is this particular case.
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