Kaelea, Inc., 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 a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 4,800 shares outstanding. Assume Kaelea has a tax rate of 35 percent.

(a)

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

(b)

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

Assume Kaelea goes through with recapitalization:

(c)

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

(d)	Calculate the percentage changes in EPS when the economy expands or enters a recession.