Pendergast, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $24,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $70,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,000 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 Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization

Recession_____ Normal______ Expansion______

b-2 Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession

Recession____%

Expansion_____%

Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

a) If EBIT is $300,000, what is the EPS for each plan?

Plan I ______

Plan II ______ b) If EBIT is $550,000, what is the EPS for each plan?

Plan I ______

Plan II ______

c) What is the break-even EBIT?