11 EBIT, Taxes and Leverage Fresenius SE & Co has no debt outstanding and a total market value of

€12.68 billion. Earnings before interest and taxes (EBIT) are projected to be €2.56 billion if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 per cent higher.

If there is a recession, then EBIT will be 60 per cent lower. Fresenius is considering a €2 billion debt issue with a 5 per cent interest rate. The proceeds will be used to repurchase shares of equity. There are currently 1 billion shares outstanding. Fresenius has a tax rate of 15 per cent.

(a) Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.

(b) Calculate the percentage changes in EPS when the economy expands or enters a recession.