River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $220,000 of debt at an interest rate of 12% and use the proceeds to repurchase 22,000 shares at $10 per share. Profits before interest are expected to be $122,000.
a. What is the ratio of price to expected earnings for River Cruises before it borrows the $220,000?
(Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio
b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price-earnings ratio