DO NOT ROUND PLEASE! :) RAK, Inc., has no debt outstanding and a total market va

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DO NOT ROUND PLEASE! :)

RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are normal. lf there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $135.000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 11.000 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 Normal Expansion 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 Expansion 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 Expansion b-2 Given the recapitalization, calculate the percentage changes in EPS when the economy expands or recession. (Negative amounts should be indicated by a minus sign. Do not round enters a intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g. 32.16.) Percentage changes in EPS Expansion eBook & Resources eBook 16.2 The Effect of EinanciaLLeverage

Explanation / Answer

Amount in $) a-1 Particular Recession   Normal   Expansion EBIT      32,000.00      40,000.00      44,000.00 Interest                     -                       -                       -   EBT      32,000.00      40,000.00      44,000.00 Taxes      11,200.00      14,000.00      15,400.00 PAT      20,800.00      26,000.00      28,600.00 No. of shares      11,000.00      11,000.00      11,000.00 EPS                 1.89                 2.36                 2.60 a-2 Particular Recession   Normal   Expansion EPS                 1.89                 2.36                 2.60 % change in EPS              (0.20)                 0.10 b-1 Particular Recession   Normal   Expansion EBIT      32,000.00      40,000.00      44,000.00 Interest        5,400.00        5,400.00        5,400.00 EBT      26,600.00      34,600.00      38,600.00 Taxes        9,310.00      12,110.00      13,510.00 PAT      17,290.00      22,490.00      25,090.00 No. of shares*      17,750.00      17,750.00      17,750.00 EPS                 0.97                 1.27                 1.41 Mkt value per share 220000/11000 20/ share *No. of shares additonal 135000/20              6,750 b-2 Particular Recession   Normal   Expansion EPS                 0.97                 1.27                 1.41 % change in EPS              (0.23)                 0.12

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