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%)