Repeat parts (a) and (b) in Problem 2 assuming the firm has a tax rate of 21 percent. Assume that the stock price will increase upon the announcement of the debt offering.

Data from Problem 2

a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession.

b. Repeat part (a) assuming that the firm goes through with recapitalization. What do you observe?