Suppose that River Cruises, which currently is all-equity-financed, issues $250,000 of debt and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on its market value. Calculate the ratio of price to expected earnings for River Cruises both before and after it borrows the $250,000. Why does the P/E ratio fall after the increase in leverage?

Price per share..............................$10.00

Operating income....................$125,000.00

Number of outstanding shares.......100,000.00

Repurchase shares.....................25,000.00