Kaelea, Inc., has no debt outstanding and a total market value of $100,000. Earn
ID: 2648012 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $100,000. Earnings before interest and taxes, EBIT, are projected to be $8,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. Kaelea is considering a $35,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Assume Kaelea has a tax rate of 35 percent.
Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)
Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
Kaelea, Inc., has no debt outstanding and a total market value of $100,000. Earnings before interest and taxes, EBIT, are projected to be $8,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. Kaelea is considering a $35,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Assume Kaelea has a tax rate of 35 percent.
Explanation / Answer
a ) Earning Per Share (EPS) = Net Income/No of Outstanding Shares
b )
% Change in EPS during recession = EPS in Normal Period-EPS in Recession Period/EPS in Normal Period
% Change in EPS during expansion= EPS in Expansion Per/iod-EPS in Normal Period/EPS in Normal Period
% change In recession in EPS = 1.36-0.94/1.36 = 31%
% change In expansion in EPS = 1.69-1.36/1.36= 24%
After the recapitalization
a )
% change In recession in EPS = 1.28-0.89/1.28 = 45%
% change In expansion in EPS = 1.59-1.28/1.28 = 24%
Particulars Recession Normal Expansion EBIT 5796 8400 10416 Tax@35% 2028.6 2940 3645.6 Net Income 3767.4 5460 6770.4 No of Outstanding Shares 4000 4000 4000 EPS 0.94 1.36 1.69Related Questions
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