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2 in particular st outstanding and a total market C(Questions 1-13) 1. EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a to value
2 in particular
st outstanding and a total market C(Questions 1-13) 1. EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a to value of $194,775. Earnings before interest and taxes, EBIT, are proiecte $13,800 if economic conditions are normal. If there is strong expansion in economy, then EBIT will be 20 percent higher. If there is a recession, then EDT will be 35 percent lower. The company is considering a $39,750 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,350 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 the company goes through with recapitalization. What do you observe? Assume the stock price remains constant. 2. EBIT, Taxes, and Leverage. Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 35 percentStep by Step Solution
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