Answer:
Part a. What will be the debt-to-equity ratio if it borrows $200,000?
25%
Part b. If earnings before interest and tax (EBIT) are $110,000, what will be earnings per share (EPS) if Reliable borrows $200,000?
$11.25 or 1125 cents
Part c. What will EPS be if it borrows $400,000?
$11.67 or 1167 cents
Explanation:
Part a. What will be the debt-to-equity ratio if it borrows $200,000?
If it Borrows $200,000 then, debt will Increase by $200,000 and Shares will decrease by $200,000 since they would be bought back under this option
Debt-to-equity ratio measures the extent to which Foreign Money is used by the Company
Debt-to-equity ratio = Total Debt / Total Equity
= $200,000/ $1,000,000 - $ 200,000
= $200,000/$800,000
= 25%
Part b. If earnings before interest and tax (EBIT) are $110,000, what will be earnings per share (EPS) if Reliable borrows $200,000?
Earnings per share (EPS) = Earnings Attributable to Ordinary Shareholders/ Weighted Average Number of Ordinary Shares in Issue during the period
=( $110,000 - $200,000×10%)/ ($800,000/$100)
= $110,000-$20,000/8,000
= $11.25 or 1125 cents
Part c. What will EPS be if it borrows $400,000?
If it borrows $400,000 then, it pursues the High -Debt Plan and exchanges debt for equity
Earnings per share (EPS) = Earnings Attributable to Ordinary Shareholders/ Weighted Average Number of Ordinary Shares in Issue during the period
= ( $110,000 - $400,000×10%)/ ($1,000,000-$400,000/$100)
= $70,000 / 6,000
= $11.67 or 1167 cents
