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Earnings Before Interest and Taxes and Leverage 16 Money Ines de totstanding and market value of 27 ANITA jected to be $21.000 itemic conditions wie se economy, then EBIT will be 25 percen bighet. If there were 40 percent lower. Memey is considering a spodbieha perdere om The proceeds will be used to tepechote hures of nude. There are currently sur outstanding. Ignore taxes for this problem a. Calculate EPS unter each of the deccomic scenario con uno de los Also calculate the percentage changes in Eps when the economy expands or enters recession b. Repeat part (a) assuming that Money goes through with recapitalization What do you observe! excel excel Earnings Before Interest and Taxes, Taxes, and Leverage 162 Repeat parts (a) and (b) in Problem 16.1 ming Money has a tax rate of 35 percent Return on Equity and Leverage 163 Suppose the company in Problem 16.1 hus a market-to-book ratio of 1.0. a. Calculate ROE under each of the three economic scenarios before any debt is issued Also calculate the percentage changes in ROE for economic expansion and recession assuming no taxes. b. Repeat part (a) assuming the firm goes through with the proposed recapitalization c. Repeat parts (a) and (b) of this problem assuming the firm has a taste of 35 percent 16.1 a. A table outlining the income statement for the three possible states of the economy is shown below. The EPS is the net income divided by the 5,000 shares outstanding. The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy. Recession Normal ERSON EBIT $12,600521,000 $26,250 Interest 0 NI $12,600521,000 $26.250 EPS $ 2.52 S 4.20 S 5.25 DEPS 40 b. If the company undergoes the proposed recapitalization, the number of shares outstanding will change. Share price = Equity/Shares outstanding Share price = $275,000/5,000 Share price = $55 Shares repurchased Debt issued / Share price Shares repurchased =$99,000/555 Shares repurchased = 1,800 shares Shares outstanding = 5,000 - 1.800 Shares outstanding = 3,200 shares The interest payment each year under all three scenarios will be: Interest payment = $99,000(0.08) = $7,920 The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy under the proposed recapitalization Recession Normal Expansion EBIT $12,60021,000 $26,250 Interest 7.920 7920 7.920 NI $4,680513,080 $18.330 EPS $1.46 $4.09 $5.73 DEPS 64.22 40.14 The use of debt magnifies variations in EPS across economic cycles