Question

Beckett, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 30 percent lower. Beckett is considering a debt issue of $75,000 with an interest rate of 6 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 final answers to 2 decimal places (e.g., 32.16).) EPS Recession Normal Expansion HAHAHA a- Calculate the percentage changes in EPS when the economy expands or enters a 2. recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Percentage changes in EPS Recession Expansion

Answer 1

Recession $22,400 $0 Before recapitalisation: Particulars EBIT less: Interest EBT less: Tax Net income number of shares al) EPS = Net income/shares Normal $32,000 $0 $32,000 Expansion $35,200 $0 $35,200 Affter recapitalisation: Particulars EBIT less: Interest EBT less: Tax Net income number of shares b-1) EPS = Net income/shares Expansion $35,200 $4,500 $30,700 Recession $22,400 $4,500 $17,900 $0 $17,900 5000 $3.58 Normal $32,000 $4,500 $27,500 $0 $27,500 5000 $5.50 $22,400 $0 $22,400 10000 $2.24 $0 $0 $0 $32,000 10000 $3.20 $35,200 10000 $3.52 $30,700 5000 $6.14 a-2) b-2) percentage change in EPS: Recession Expansion - 30.00% 10.00% (2.24-3.20) 3.20 (3.52-3.20) - 3.20 percentage change in EPS: Recession Expansion -34.91% 11.64% (3.58-5.50 -5.50 (6.14-5.50) -5.50 |