Question
Intro Zambezi Corp. expects EBIT to vary with the state of the economy as follows: State of economy EBIT (in $ million) Boom 560 Base
Intro
Zambezi Corp. expects EBIT to vary with the state of the economy as follows:
State of economy | EBIT (in $ million) |
Boom | 560 |
Base | 125 |
Bust | -200 |
Zambezi doesn't have any long-term debt and has 81 million shares outstanding, currently trading at $8.42. Because of political connections, it doesn't pay any taxes.
Part 1
What are the expected earnings per share (EPS) during a boom?
Correct
Since the company doesn't have any debt, it doesn't pay interest. It also doesn't pay taxes. Therefore, EBIT and net income are the same in this case:
EPS=Net incomeNumber of shares outstanding=56081=EPS=Net incomeNumber of shares outstanding=56081= 6.91
Part 2
What are the expected earnings per share (EPS) during a bust?
Correct
EPS=Net incomeNumber of shares outstanding=20081=EPS=Net incomeNumber of shares outstanding=-20081= -2.47
.
Part 3
Zambezi now issues bonds worth $33 million to buy back some shares. How many shares are outstanding after the restructuring (in million)?
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