Pendergast, Inc., has no debt outstanding and a total market value of $81,000. E

Question

Pendergast, Inc., has no debt outstanding and a total market value of $81,000. Earnings before interest and taxes, EBIT, are projected to be $9,800 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. Pendergast is considering a $23,100 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,400 shares outstanding. Ignore taxes for this problem.

Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued

Calculate the percentage changes in EPS when the economy expands or enters a recession

Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.

Calculate the percentage changes in EPS when the economy expands or enters a recession.

Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.

Explanation / Answer

EBIT -Normal : =9800-0.08*23100 (A) 7952 EBIT -Expands=9800*1.23-0.08*23100(B) 10206 EBIT-Recession=9800*(1-0.32)-0.08*23100

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