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Chapter Sixteen Homework G

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Fujita, Incorporated, has no debt outstanding and a total market value of $408,900.

Earnings before interest and taxes, BIT, are projected to be $54,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 21 percent lower. The company is considering a $200,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,700 shares outstanding.

The company has a tax rate of 22 percent, a market-to-book ratio of 1.0, and the stock

price remains constant.

a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

b-2. Given the recapitalization, calculate the percentage changes in EPS when the

economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

a-1. Recession EPS a-1. Normal EPS a-1. Expansion EPS

a-2. Recession percentage change in EPS a-2. Expansion percentage change in EPS b-1. Recession EPS

b-1. Normal EPS

B-2. Recession EPS

B-1. normal EPS

B-1. expansion EPS

B-2. Recession percentage change in EPS

B-2. expansion percentage change in EPS

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Dickson Corporation is comparing two different capital structures. Plan I would result in 24,000 shares of stock and $82,500 in debt. Plan II would result in 18,000 shares of stock and $247,500 in debt. The interest rate on the debt is 4 percent.

a.

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $85,000. The all-equity plan would result in 27,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

b.

In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.)

C.

Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

d-1. Assuming that the corporate tax rate is 25 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

d-2. Assuming that the corporate tax rate is 25 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.)

d-3. Assuming that the corporate tax rate is 25 percent, when will EPS be identical for

Plans I and II? (Do not round intermediate calculations.)

a. Plan I EPS

a. Plan II EPS

1. All-equity EPS
2. Plan I and all-equity break-even EBIT
3. Plan II and all-equity break-even EBIT
4. Plan I and Plan II break-even EBIT d-1. Plan I EPS d-1. Plan II EPS d-1. All-equity EPS
5. Plan II and all-equity break even EBIT
6. Plan I and Plan II break-even EBIT
7. Plan I EPS
8. Plan II EPS
9. All-equity EPS
10. Plan I and all-equity break-even EBIT
11. Plan II and all-equity break-even EBIT
12. Plan I and Plan II break-even EBIT