Question
Cloudy Corporation has no debt outstanding and a total market value of RM175,000. EBIT are projected to be RM16,000 if economic conditions are normal. If
Cloudy Corporation has no debt outstanding and a total market value of RM175,000. EBIT are projected to be RM16,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 35 percent higher. Cloudy is considering a RM70,000 debt issue with a 7 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Cloudy has a tax rate of 34 percent.
Required: Calculate the earnings per share (EPS) under each of these economic scenarios assuming that the company goes through with recapitalization.
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