Answers are provided in brackets, please show solutions as to how the right answer is derived. Thanks.

Control Inc., has no debt outstanding and a total market value of $100,000. EBIT is projected to be $6,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. The firm is considering a $40,000 debt issue with 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Assume Control Inc., has a tax rate of 35%

a. Calculate 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. (Ans. No debt: Normal 1.56, Boom 2.03, Bust 0.624)

b. Repeat part (a) assuming that the firm goes through with capitalization. What do you observe? (Ans. With debt: Normal 1.73, Boom 2.51, Bust 0.17)'