Pendergast, Inc., has no debt outstanding and a total market value of $63,000. E
ID: 2719557 • Letter: P
Question
Pendergast, Inc., has no debt outstanding and a total market value of $63,000. Earnings before interest and taxes, EBIT, are projected to be $8,600 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 percent higher. If there is a recession, then EBIT will be 34 percent lower. Pendergast is considering a $21,300 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,200 shares outstanding. Ignore taxes for this problem.
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. Round your answers to 2 decimal places (e.g., 32.16).)
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. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
Pendergast, Inc., has no debt outstanding and a total market value of $63,000. Earnings before interest and taxes, EBIT, are projected to be $8,600 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 percent higher. If there is a recession, then EBIT will be 34 percent lower. Pendergast is considering a $21,300 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,200 shares outstanding. Ignore taxes for this problem.
Explanation / Answer
(a)
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).)
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).)
Assume Pendergast goes through with recapitalization.
=63000/4200 =$15 per share
=21300/15 =1420 share buy back
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).)
(b)
Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
Recession Normal Expansion EBIT 8600 8600 8600 Increase/Decrease -2924 0 1806 Net profit 5676 8600 10406 Share outstanding 4200 4200 4200 EPS = Net income /share outstanding 1.35 2.05 2.48Related Questions
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