Minion, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 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 25 percent lower. The company is considering a $60,000 debt issue with an interest rate of 7 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. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.
Normal:
EBIT = $28,000
Recession:
EBIT = $28,000 - 25% * $28,000
EBIT = $21,000
Expansion:
EBIT = $28,000 + 20% * $28,000
EBIT = $33,600
Answer a-1.
Total Value = $150,000
Number of shares outstanding = 10,000
Price per share = Total Value / Number of shares
outstanding
Price per share = $150,000 / 10,000
Price per share = $15.00
Answer a-2.
If economy expand:
Percentage Change in EPS = ($3.36 - $2.80) / $2.80
Percentage Change in EPS = 20.00%
If economy collapse:
Percentage Change in EPS = ($2.10 - $2.80) / $2.80
Percentage Change in EPS = -25.00%
Answer b-1.
Value of Debt = $60,000
Interest Expense = 7% * $60,000
Interest Expense = $4,200
Value of Equity = $90,000
Price per share = $15.00
Number of shares outstanding = $90,000 / $15.00
Number of shares outstanding = 6,000
Answer b-2.
If economy expand:
Percentage Change in EPS = ($4.90 - $3.97) / $3.97
Percentage Change in EPS = 23.43%
If economy collapse:
Percentage Change in EPS = ($2.80 - $3.97) / $3.97
Percentage Change in EPS = -29.47%
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