Kaelea, Inc., has no debt outstanding and a total market value
of $82,000. Earnings before interest and taxes, EBIT, are projected
to be $8,500 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 35 percent lower. The
company is considering a $28,200 debt issue with an interest rate
of 7 percent. The proceeds will be used to repurchase shares of
stock. There are currently 4,100 shares outstanding. Assume the
company has a tax rate of 30 percent.
a. 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.)
EPS | |
Recession | $ |
Normal | $ |
Expansion | $ |
b. 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 the nearest whole number, e.g.,
32.)
%ΔEPS | |
Recession | % |
Expansion | % |
Assume the company goes through with recapitalization.
c. Calculate earnings per share, EPS, under each
of the three economic scenarios after the recapitalization.
(Do not round intermediate calculations and round your
answers to 2 decimal places, e.g.,
32.16.)
EPS | |
Recession | $ |
Normal | $ |
Expansion | $ |
d. 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.)
%ΔEPS | |
Recession | % |
Expansion | % |
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