Question

BASIC QUESTIONS (1-13 1. EBIT and Leverage. Bushranger Building Ltd (BBL) has no debt outstanding and a total marker will be g a $51 000 value of $156 000. Earnings before interest and taxes, EBIT, are projected to be $13 100 if economic conditions are normal. If there is strong expansion in the economy, then EBIT 15% higher. If there is a recession, then EBIT will be 25% lower. BBL is considerin debt issue with a 5.5%interest rate. The proceeds will be used to repurchase ordinary shares There are currently 7820 ordinary shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share, EPS, under each of the three economic scenarios before any de is issued. Also, calculate the percentage changes in EPS when the economy expands or enter b. Repeat parta, assuming that BBL goes through with recapitalisation. What do you EBIT, Taxes and Leverage. Repeat parts a and b in Problem 1, assuming Bushranger Building a recession. observe? LO 13.1 has a tax rate of 30%. LO 13.2

Answer 1

a) Cu Ke cession E BIT Eaming aftertax 131oo 13loo efo 792o 73 2o 93-168 1y. 88 26-468 1'6& 5/ ecapitalisahien /9.95 556 Cenolittm 15065 13/eo 28o5 BIT 122 6O Eaning atoa tax Io29S ofsharus 56y 7020 526Y 1-33

Tax rat< @ 301 a) Earming hasie balare 1eapitalisaim au sTm 5065 kcesSic EBIT 3 180 13/eo Tox a3oj. 3930 835 2948 & 20 -24.791。 4520 Nぎ chan 16. 3 8 y . Recession 1825 R&OS Norm」 fopomsim 50 65 8oS &26O 3 678 EBIT 1020 2lo 6 E BT sa 64 sa 37163 . 93 132-17