Charny Inc. has no debt outstanding and a total market value of $165,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 25% lower. Charny is considering a $60,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,500 shares outstanding. Charny has a tax rate of 35%.

a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Omit $ sign in your response.)

EPS

Recession

$

Normal

$

Expansion

$

a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative answers should be indicated by a minus sign.)

	Percentage changes in EPS
Recession	%
Expansion	%

b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Round the final answers to 2 decimal places. Omit $ sign in your response.)

	EPS
Recession	$
Normal	$
Expansion	$

b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.)

Percentage changes in EPS
Recession	%
Expansion	%