In Problem 2, suppose instead that you assume the company has a market-to-book ratio of 1.0 before recapitalization and the stock price changes according to MM. How would this affect your answer?

Data From Problem 2

Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.

a and b Part in Problem 1

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 company goes through with recapitalization. What do you observe?