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Earnings and Leverage, Investment Opportunity, Tax Shield, WACC, Market value

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Attached is an Excel file with five problems:

E15: Earnings and leverage
E19: Capital investment opportunity
E22: Tax shields
E24: Market value of firm

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Please see the attached Excel file for the complete tutorial.

15. Earnings and Leverage. Reliable Gearing currently is a 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 after each contemplated restructuring?

b. If earnings before interest and tax (EBIT) will be either $90,000 or $130,000, what will be earnings per share for each financing mix for both possible values of EBIT?

If both scenarios are equally likely, what is expected EPS under ...

Solution Summary

The investment opportunities, tax shields, WACC and market values are examined.