Question
Proposed capital structure Debt: $50,000. Cost of debt: 8%. Proceeds are used for purchase of equity. (a) Calculate EPS under each of the three economic
Proposed capital structure Debt: $50,000. Cost of debt: 8%. Proceeds are used for purchase of equity.
(a) Calculate EPS under each of the three economic scenarios before debt is issued. Calculate the percentage changes in EPS when the economy expands or contracts.
(b) Repeat part (a) with the proposed capital structure.
(c) Suppose the market-to-book ratio is 1. Calculate the ROE.
Assume no taxes.
Current capital structure
Debt: zero. Equity: $200,000, total number of shares: 5,000. EBIT: Normal – $21,000; Expansion – 20% higher; Recession 25% lower.
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Financial Reporting Financial Statement Analysis And Valuation A Strategic Perspective
Authors: James M Wahlen, Stephen P Baginskl, Mark T Bradshaw
7th Edition
9780324789423, 324789416, 978-0324789416
