Question

Minion, Inc., has no debt outstanding and a total market value of $251,600. Earnings before interest and taxes, EBIT, are projected to be $41,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 26 percent lower. The company is considering a $135,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. The company has a tax rate of 24 percent, a market-to-book ratio of 1.0, and the stock price remains constant. 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.

Answer 1

Before recapitalisation: Affter recapitalisation: Expansion $47,150 Particulars Recession Normal Expansion Particulars Recession Normal $30,340 $41,000 $47,150 $30,340 $41,000 ЕBIT EBIT $10,800 $0 $0 $10,800 $10,800 less: $0 less: Interest Interest $30,340 $7,282 $19,540 $41,000 $47,150 $30,200 $36,350 ЕВT ЕВT Таx $9,840 $4,690 $7,248 $8,724 less: $11,316 less: Таx $23,058 $31,160 $35,834 $14,850 $22,952 $27,626 Net income Net income number of shares number of shares 7400 7400 7400 3429 3429 3429 EPS Net income/shares EPS Net income/shares $3.12 $4.21 $4.84 $4.33 $6.69 $8.06 а1) b-1) percentage change in EPS: а-2) b-2) percentage change in EPS: Recession -26.00% (3.12-4.21) 4.21 Recession -35.30% (4.33-6.69)-6.69 Expansion 15.00% (4.84-4.21) 4.21 20.36% (8.06-6.69) 6.69 Expansion