Only need help with B-1 got everything else right besides that part, cannot seem
ID: 2732884 • Letter: O
Question
Only need help with B-1 got everything else right besides that part, cannot seem to figure it out
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $90,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. RAK has a tax rate of 35 percent.
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.)
EPS Recession $ 1.35
Normal $ 1.69
Expansion $ 1.89
a-2 Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Percentage changes in EPS
Recession -20 %
Expansion 12 %
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.)
EPS
Recession $ 3.85 WRONG
Normal $ 5.15 WRONG
Expansion $ 5.93 WRONG
b-2 Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Percentage changes in EPS Recession -25.24 %
Expansion 15.15 %
Explanation / Answer
Rak Inc EPS calculation under recapitalization Market value before debt Issue 150,000 Outstanding commom shares before repurchase 10,000 Market Price per share 15 Debt Issued 90,000 Shares repurchased 6,000 Outstanding no of stocks after repurchase 4,000 EPS calculation Economic Conditions Normal Strong Expansion Recession EBIT 26,000 29,120 20,800 Debt Interest @6% on $90,000 5,400 5,400 5,400 Earning before Tax 20,600 23,720 15,400 Tax @35% 7,210 8,302 5,390 Net Income 13,390 15,418 10,010 Outstanding common stock 4,000 4,000 4,000 b-1 EPS = $ 3.35 $ 3.85 $ 2.50 b-2 % change in EPS over normal situation= 15.15% -25.24%
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