Wing Air, Inc. has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes (EBIT) are projected to be $25,000 if economic conditions are normal. If the economy is strong then EBIT will be 20% percent higher. In the event of a recession, EBIT will be 35% percent lower. Wing Air is considering a $96,000 debt issue with an interest rate of 6% percent. The proceeds of which will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. 1. Calculate the earnings per share (EPS) under each of the three scenarios before any debt is issued. Assume a 30% tax rate. 2. Calculate the percentage change in EPS when the economy expands or enters a recession. Assume a 30% tax rate. Market value EBIT $250,000 $25,000 20% 35% Expansion-EBIT Recession-EBIT Debt issue Interest rate Shares outstanding $96,000 6% 6,000 30% Tax Rate 1. Calculate the earnings per share (EPS) under each of the three scenarios before any debt is issued. Assume a 30% tax rate. 2. Calculate the percentage change in EPS when the economy expands or enters a recession. Assume a 30% tax rate. | $250,000 $25,000 20% Market value EBIT Expansion-EBIT Recession-EBIT Debt issue Interest rate Shares outstanding Tax rate Solution template: No debt with taxes EBIT Interest Taxes $96,000 6% NI 1 6 EPS ,000 30% Change EPS% With debt and taxes Share price = Shares repurchased = EBIT Interest Taxes NI EPS Change EPS%