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Summer Tan, Inc., is an all-equity firm with a total market value of $465,000 and 32,900...

Summer Tan, Inc., is an all-equity firm with a total market value of $465,000 and 32,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $73,800 if the economy is normal. If there is a recession, EBIT will be 10 percent lower, and if there is a boom, EBIT will be 20 percent higher. The tax rate is 34 percent. What is the EPS in a boom?

Multiple Choice

  • $1.18

  • $1.78

  • $1.63

  • $1.33

  • $1.48

Northeast Lobster currently has 19,400 shares of stock outstanding. It is considering issuing $154,000 of debt at an interest rate of 7.2 percent. The break-even level of EBIT between these two capital structure options is $113,000. For this to be true, what is the current stock price? Ignore taxes.

Multiple Choice

  • $88.60

  • $84.75

  • $80.90

  • $92.46

  • $76.85

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Answer #1

1)

EPS in boom:

= Expected Net income/number of shares

= $73,800×(1+20%)×(1-34%)/32,900

= $58,450/32,900

= $1.78

Hence, correct option is $1.78

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