Google Inc. is an all-equity firm with 18,000 shares of stock outstanding and a total market value of $400,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $25,000 if the economy is normal, $10,000 if the economy is in a recession, and $40,000 if the economy booms. Ignore taxes. Management is considering issuing $90,000 of debt with an interest rate of 6%. If the firm issues the debt, the proceeds will be used to repurchase stock.

a) What will the earnings per share (EPS) be if the debt is issued and the economy is in a recession?

b) If the economy booms, is the resulted EPS going to be higher or lower, explain (no need to calculate)