Question

​​​​​Walker, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $19,000 if economic conditions are normal. If there is an expansion in the economy, then EBIT will be $28,000. If there is a recession, then EBIT will be $12,000. Walker is considering a $66,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock (this is known as recapitalization). There are currently 3,000 shares outstanding. Walker has a market-to-book ratio of 1.0.

1. Repeat part (g) assuming a corporate tax rate of 35%. (Round answers to 2 decimal places. Do not round intermediate calculations

1. Repeat part (h) assuming a corporate tax rate of 35%. (Round answers to 2 decimal places. Do not round intermediate calculations)
2. Repeat part (i) assuming a corporate tax rate of 35%.
   
   g. Calculate earnings per share (EPS) under normal economic conditions assuming that the firm goes through with the recapitalization. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations) 8.26 h. Calculate earnings per share (EPS) under the economic expansion assuming that the firm goes through with the recapitalization. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations) 13.00 i. Calculate earnings per share (EPS) under the economic recession assuming that the firm goes through with the recapitalization. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations) 4.58
   

Answer 1

Affter recapitalisation: Particulars EBIT less: Interest EBT less: Tax Net income number of shares EPS = Net income/shares Recession $12,000 $3,300 $8,700 $0 $8,700 1900 $4.58 Normal $19,000 $3,300 $15,700 $0 $15,700 1900 $8.26 Expansion $28,000 $3,300 $24,700 $0 $24,700 1900 $13.00

Answer: without tax $8.26 $13.00 $13.00

Affter recapitalisation: Particulars EBIT less: Interest EBT less: Tax Net income number of shares EPS = Net income/shares Recession $12,000 $3,300 $8,700 $3,045 $5,655 1900 $2.98 Normal $19,000 $3,300 $15,700 $5,495 $10,205 1900 $5.37 Expansion $28,000 $3,300 $24,700 $8,645 $16,055 1900 $8.45

Answer: With tax: $5.37 $8.45 $8.45 h)