Problem: Company A is equity financed with 10000 shares of equity outstanding selling for $100 a share. It is restructuring. Low debt plan is to issue debt of $200,000 with proceeds to buy the stock. The high debt lan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10%. Company A pays no taxes.
Q1. What is the debt to equity ratio after each restructuring?
Q2. If EBIT is either $90,000 or $130,00 what is the earning per share for each financing mix for both possible value of EBIT?
Q3. Suppose EBIT is $100,000 what is EPS under each financing mix?
Q4. Why is it the same in this case?