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
E23: WACC
E24: Market value of firm
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Solution Summary
The investment opportunities, tax shields, WACC and market values are examined.
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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 ...
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