Money, Inc., has no debt outstanding and a total market value of $150,000. Earni
ID: 2752211 • Letter: M
Question
Money, 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. Money 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. 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 and round your final 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 assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
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 and round your final answers to 2 decimal places. (e.g., 32.16))
Money, 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. Money 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. Ignore taxes for this problem.
Explanation / Answer
SOLUTION :
normal
expansion
recession
EBIT
26000
29120
20800
Less :Interest
0
0
0
EBT
26000
29120
20800
a1
no of shares outstanding
10000
10000
10000
EPS (EBT/no of shares outstanding)
2.6
2.912
2.08
a2
% Change in EPS
12.00%
-28.57%
(2.912-2.6)/2.6
(2.08-2.6)/2.6
normal
expansion
recession
EBIT
26000
29120
20800
Less :Interest (90000*.06)
5400
5400
5400
EBT
20600
23720
15400
no of shares outstanding 10000 - repurchase(90000/15) =
4000
4000
4000
b1
EPS (EBT/no of shares outstanding)
5.15
5.93
3.85
b-2
% Change in EPS
15.15%
-35.08%
(5.93-5.15)/5.15
(3.85-5.15)/5.15
normal
expansion
recession
EBIT
26000
29120
20800
Less :Interest
0
0
0
EBT
26000
29120
20800
a1
no of shares outstanding
10000
10000
10000
EPS (EBT/no of shares outstanding)
2.6
2.912
2.08
a2
% Change in EPS
12.00%
-28.57%
(2.912-2.6)/2.6
(2.08-2.6)/2.6
normal
expansion
recession
EBIT
26000
29120
20800
Less :Interest (90000*.06)
5400
5400
5400
EBT
20600
23720
15400
no of shares outstanding 10000 - repurchase(90000/15) =
4000
4000
4000
b1
EPS (EBT/no of shares outstanding)
5.15
5.93
3.85
b-2
% Change in EPS
15.15%
-35.08%
(5.93-5.15)/5.15
(3.85-5.15)/5.15
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.