EBIT and Leverage Geld NV has no debt outstanding, and a total market value of €150,000. Earnings before interest and taxes, EBIT, are projected to be €14,000 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. Geld is considering a €60,000 debt issue with a 5 per cent interest rate. The proceeds will be used to repurchase shares of equity. There are currently 2,500 shares outstanding. Ignore taxes for this problem.

(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 Geld goes through with recapitalization. What do you observe?