Question

c) Teme Berhad has no debt outstanding and a total market value of RM136,000. Earnings before interest and taxes, EBIT, are projected to be RM12,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 27 percent higher. If there is a recession, then EBIT will be 55 percent lower. Teme Berhad is considering a RM54.000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,000 shares outstanding and with 35 percent corporate taxes. Required: Calculate the earnings per share (EPS) under each of these economic scenarios assuming that the company goes through with recapitalization.

Answer 1

Calculating earning per share under different scenarios:-
Particular	Expansion (amt in RM)	Normal (Amt in RM)	Recession (Amt in RM)
EBIT	15240	12000	5400
Less : Interest (54000*5%)	2700	2700	2700
EBT	12540	9300	2700
Less : Tax@35%	4389	3255	945
Net Income (a)	8151	6045	1755
No. of Outstanding Shares (b)	1206	1206	1206
EPS [(a)/(b)]	6.76	5.01	1.46
Note- calculating no of Outstanding Shares after Capitalisation
Total market value (a)	RM136000
No of shares o/s before capitalisation (b)	2000
Share Price (a)/(b)	RM 68
Market Value after Capitalisation = RM 136000 - RM54000
	= RM 82000
No of Share o/s after capitalisation = RM 82000/RM68
	= 1206

Note- EBIT in Expansion is increase to 27 percent higher = RM12000(1+.27) ; = RM 15240

EBIT in Recession is decreased  to 55 percent lower = RM12000(1-0.55) ; = RM 5400

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