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Problem 1 6 - 1 EBIT and Leverage Fujita, Incorporated, has no debt outstanding and a total market value of $ 2 4 0 ,

Problem 16-1 EBIT and Leverage
Fujita, Incorporated, has no debt outstanding and a total market value of $240,000.
Earnings before interest and taxes, EBIT, are projected to be $19,000 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 25 percent lower. The company
is considering a debt issue of $120,000 with an interest rate of 6 percent. The proceeds
will be used to repurchase shares of stock. There are currently 6,000 shares
outstanding. Ignore taxes for this problem. Assume the stock price is constant under all
scenarios.
a-1. Calculate earnings per share (EPS) under each of the three economic scenarios
before any debt is issued. (Do not round intermediate calculations and round your
answers to 2 decimal places, e.g.,32.16.)
a-2. Calculate the percentage changes in EPS when the economy expands or enters a
recession. (A negative answer should be indicated by a minus sign. Do not round
intermediate calculations and enter your answers as a percent rounded to 2
decimal places, e.g.,32.16.)
b-1. Calculate earnings per share (EPS) under each of the three economic scenarios
assuming the company goes through with recapitalization. (Do not round
intermediate calculations and round your answers to 2 decimal places, e.g.,
32.16.)
b-2. Given the recapitalization, calculate the percentage changes in EPS when the
economy expands or enters a recession. (A negative answer should be indicated
by a minus sign. Do not round intermediate calculations and enter your answers
as a percent rounded to 2 decimal places, e.g.,32.16.)
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