Kaelea, Inc., has no debt outstanding and a total market value of $82,000. Earnings before interest and taxes, EBIT, are projected to be $8,500 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $28,200 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,100 shares outstanding. Assume Kaelea has a tax rate of 30 percent.

Requirement 1:

(a)

Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.

EPS

Recession $____

Normal $____

Expansion $____

(b)

Calculate the percentage changes in EPS when the economy expands or enters a recession. Recession %___

Expansion %____

Requirement 2:

Assume Kaelea goes through with recapitalization.

(a)

Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.

EPS

Recession $____

Normal $____

Expansion $____

(b)	Calculate the percentage changes in EPS when the economy expands or enters a recession. Recession %___ Expansion %____