RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 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 30 percent lower. RAK is considering a $66,000 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.

recession____

normal_____

expansion_____

a-2

Calculate the percentage changes in EPS when the economy expands or enters a recession

Recession_____

expansions_____

b-1	Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. normal_____ recession_____ expansion_____

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