Question
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 if
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 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 30 percent lower. RAK is considering a $75,000 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.
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)
Recession?
Normal?
Expansion?
a-2: Calculate the percentage changes in EPS when the economy expands or enters a recession. (Enter your answers as a percent rounded to 2 decimal places)
Recession (-30%)
Expansion (10%)
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)
Recession?
Normal?
Expansion?
b-2: Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Enter your answers as a percent rounded to 2 decimal places)
Recession (-34.91%)
Expansion (11.64%)
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