Answer:
a. The debt-to-equity ratio would be 0.168
b. The earnings per share (EPS) if Reliable borrows $330,000 would be of $10.34 per share
c. The earnings per share (EPS) if Reliable borrows $530,000 would be of $10.27 per share
Explanation:
a. According to the given data we have the following:
Number of shares=23,000
Share Price=$100
Hence, Total Share Value=23,000*$100=$2,300,000
If debt of $330,000 is taken and equivalent equity is retired, balance equity=$2,300,000-$33,0000=$1,970,000
Therefore, the Debt/Equity ratio would be as follows:
Debt/Equity ratio=$330,000/$1,970,000
Debt/Equity ratio=0.168
b. According to the given data we have the following:
EBIT=$240,000
Interest=0.11*$330,000=$36,300
Hence, Earning after interest and zero taxes=$240,000-$36,300=$203,700
Shares =1,970,000/100=19,700
Therefore, The Earning per share=$203,700/19,700=$10.34
c. According to the given data If he borrows 530000, the equity left =$2,300,000-$530,000=$1,770,000
Number of shares=1,770,000/100=17,700
EBIT=$240,000
Interest=0.11*530,000=$58,300
Hence, Earning after interest and zero taxes=$240.000-$58,300= $181,700
Therefore the Earning per share=$181,700/17,700=$10.27
