$1$ Problem $16-3$ Leverage and Earnings $($LO$1)$

River Cruises is all$-$equity$-$financed.

Suppose it now issues $$250,000$ of debt at an interest rate of $10\%$ and uses the proceeds to repurchase $25,000$ shares. Assume that

the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data.

NOTE that EPS's before the repurchase of stock were as follows: $$0\mathrm{.}79,$$$1\mathrm{.}33,$$$1\mathrm{.}945.$

Also, note that the earnings $($income$)$ decreases due to the added interest expense.

Also, note that the number of shares declines.

Are the new EPS's and the new Return on Shares $(=$ EPS$/$Price$)$ after the repurchase, higher or lower for each economic state?

Notice that additional debt will increase the range of the EPS's and the range of the returns.

Note: Do not round intermediate calculations. Round "Earnings per share" to $3$ decimal places. Enter "Return on shares" as a

percent rounded to $2$ decimal places.