RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $90,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem.

a1.) Calculate EPS under each scenario:

Recession = $

Normal = $

Expansion = $

a2.) Calculate percentage change in EPS when the economy expands or enters a recession.

Recession % =

Expansion % =

b1.) Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.

Recession = $

Normal = $

Expansion = $

b2.) Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

Recession % =

Expansion % =