Question
Money, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if
Money, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 25 percent lower. Money is considering a $48,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 20,000 shares outstanding. Ignore taxes for this problem.
a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued: Recession: Normal: Expansion
a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. Recession: Expansion:
b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization: R: N: E:
b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession R: E:
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