Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Fujita, Incorporated, has no debt outstanding and a total market value of $ 2 5 1 , 6 0 0 . Earnings before interest and

Fujita, Incorporated, has no debt outstanding and a total market value of $251,600. Earnings before interest and taxes, EBIT, are projected to be $41,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 26 percent lower. The company is considering a $135,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. The company has a tax rate of 24 percent, a market-to-book ratio of 1.0, and the stock price remains constant.
a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.
Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g.,32.16.
a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.
b-1. Calculate earnings per share, EPS, under each of the three economic scenarios assuming the company goes through with recapitalization.
Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g.,32.16.
b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.
\table[[a-1. Recession EPS,,],[Normal EPS,,],[Expansion EPS,,],[a-2. Recession percentage change in EPS,,%
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Health Care Finance And The Mechanics Of Insurance And Reimbursement

Authors: Michael K. Harrington

2nd Edition

1284169030, 978-1284169034

More Books

Students also viewed these Finance questions

Question

5. What are the other economic side effects of accidents?

Answered: 1 week ago