Question

Beckett, Inc., has no debt outstanding and a total market value of $ 180,000. Earnings before interest and taxes, EBIT, are projected to be $ 17,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 36 percent higher. If there is a recession, then EBIT will be 72 percent lower. Beckett is considering an $ 72,000 debt issue with a 4 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,000 shares outstanding. Ignore taxes for this problem.

Required:

(a)

Earnings per share, EPS, for the recession, normal, and expansion scenarios before any debt is issued are $__X__ , $__Y__ , and $__Z__ , respectively (Round your answers to 2 decimal places. (e.g., 32.16)). If the economy enters a recession or expands, EPS will change by __XX__ percent or __YY__ percent, respectively (Negative amount should be indicated by a minus sign. Do not round interim calculations. Round your answers to 2 decimal places. (e.g., 32.16)).

(b)

Now assume that Beckett goes through with recapitalization. Earnings per share, EPS, for the recession, normal, and expansion scenarios are $__X__ , $__Y__ , and $__Z__ , respectively (Round your answers to 2 decimal places. (e.g., 32.16)). If the economy enters a recession or expands, EPS will change by __XX__ percent or __YY__ percent, respectively (Negative amount should be indicated by a minus sign. Do not round interim calculations. Round your answers to 2 decimal places. (e.g., 32.16)).

Answer 1