1 Michaels is a levered firm with $55,000 of debt Michaels pays tax at the rate of 30 The firm faces EBIT scenarios of recession, normal, and boom Note EBIT earnings before interest and tax, $ Interest dollar amount of interest owed on the debt, NIBT net income before tax, NI net income, EPS earnings per share Assume that firms with zero or negative NIBT pay zero in tax EBIT $ INTEREST NIBTTAXES NI EPS BOOM $9,000 $4,400 NORMAL $1,137 RECESSION $2,000 $6 00 What coupon interest rate does Michaels pay on its debt a 5 b 6 c 7 d 9 e 8 2 Michaels is a levered firm with $55,000 of debt Michaels pays tax at the rate of 30 The firm faces EBIT scenarios of recession, normal, and boom Note EBIT earnings before interest and tax, $ Interest dollar amount of interest owed on the debt, NIBT net income before tax, NI net income, EPS earnings per share Assume that firms with zero or negative NIBT pay zero in tax EBIT $ INTEREST NIBTTAXES NI EPS BOOM $9,000 $4,400 NORMAL $1,137 RECESSION $2,000 $6 00 What amount comes closest to Michaels EPS in the BOOM scenario a $2 44 b $4 11 c $0 57 d $5 32 e $8 05

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1. Michaels is a levered firm with $55,000 of debt. Michaels pays tax at the rate of 30%. The firm faces EBIT scenarios of recession,

1. Michaels is a levered firm with $55,000 of debt. Michaels pays tax at the rate of 30%. The firm faces EBIT scenarios of recession, normal, and boom. {Note: EBIT = earnings before interest and tax, $ Interest = dollar amount of interest owed on the debt, NIBT = net income before tax, NI = net income, EPS = earnings per share}. Assume that firms with zero or negative NIBT pay zero in tax. ..EBIT..$ INTEREST.. NIBTTAXES NI.EPS ----------------------------------------------------------------------------------- BOOM .$9,000.$4,400 NORMAL...... $1,137 RECESSION.$2,000........-$6.00 What coupon interest rate does Michaels pay on its debt?

	a.	5%
	b.	6%
	c.	7%
	d.	9%
	e.	8%

2. Michaels is a levered firm with $55,000 of debt. Michaels pays tax at the rate of 30%. The firm faces EBIT scenarios of recession, normal, and boom. {Note: EBIT = earnings before interest and tax, $ Interest = dollar amount of interest owed on the debt, NIBT = net income before tax, NI = net income, EPS = earnings per share}. Assume that firms with zero or negative NIBT pay zero in tax. ..EBIT..$ INTEREST.. NIBTTAXES NI.EPS ----------------------------------------------------------------------------------- BOOM .$9,000.$4,400 NORMAL....... $1,137 RECESSION.$2,000..........-$6.00 What amount comes closest to Michaels EPS in the BOOM scenario?