Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earni
ID: 2717581 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 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 $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assume Kaelea has a tax rate of 40 percent.
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 $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 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 $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assume Kaelea has a tax rate of 40 percent.
Assume Kaelea goes through with recapitalization. (a)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).)
EPS Recession $ Normal $ Expansion $ (b)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).)
%EPS Recession % Expansion %Explanation / Answer
Current share price = 75000 / 5000 = $15
No. of shares purchased = 22500 / 15 = 1500
Remaining shares = 5000 - 1500 = 3500
Interest on debt = 8%* 22500 = 1800
Calculations according to the question are done in the below table
Percentage change:
Recession = (0.80-1.30)/1.30 = -38.34%
Expansion = (1.69-1.30)/1.30 = 29.68%
Economy EBIT Interest PBT Tax @ 40% Net Income EPS Recession 6,486 1,800 4,686 1,874.40 2,811.60 0.80 Normal 9,400 1,800 7,600 3,040.00 4,560.00 1.30 Expansion 11,656 1,800 9,856 3,942.40 5,913.60 1.69Related Questions
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