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Fujita, Incorporated, has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if
Fujita, Incorporated, has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem. |
a-1. | Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (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. (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. (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. (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.) |
\begin{tabular}{|l|r|l|} \hline a-1. Recession EPS & & \\ \hline a-1. Normal EPS & & \\ \hline a-1. Expansion EPS & -30.00 & % \\ \hline a-2. Recession percentage change in EPS & 18.00 & % \\ \hline a-2. Expansion percentage change in EPS & & \\ \hline b-1. Recession EPS & & \\ \hline b-1. Normal EPS & & \\ \hline b-2. Expansion EPS & 31.09 & % \\ \hline b-2. Recession percentage change in EPS & 51.82 & % \\ \hline b-2. Expansion percentage change in EPS & & \\ \hline \end{tabular}
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