Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Jeffys, has no debt outstanding and a total market value of $120,000. Earnings before interest and taxes, EBIT, are projected to be $9,200 if economic

Jeffys, has no debt outstanding and a total market value of $120,000. Earnings before interest and taxes, EBIT, are projected to be $9,200 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $37,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,800 shares outstanding. Ignore taxes for this problem.

Requirement 1:
(a)

Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places

EPS
Recession $
Normal $
Expansion $

(b)

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places

%EPS
Recession %
Expansion %

Requirement 2:
Assume Jeffys goes through with recapitalization.

(a)

Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places

EPS
Recession $
Normal $
Expansion $

(b)

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places

%EPS
Recession %
Expansion %

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

Short Term Financial Management

Authors: Ned C Hill

1st Edition

0023548207, 978-0023548208

More Books

Students also viewed these Finance questions