Kaelea, Inc., has no debt outstanding and a total market value of $117,000. Earn

Question

Kaelea, Inc., has no debt outstanding and a total market value of $117,000. Earnings before interest and taxes, EBIT, are projected to be $8,300 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. Kaelea is considering a $41,700 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 3,900 shares outstanding. Assume Kaelea has a tax rate of 34 percent.

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).) Recession:

Normal:

Expansion:

Requirement 2:

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.))

Recession:

Normal:

Expansion:

Note: The answers for Requirement 1 are not $1.45, $2.13, and $2.62 and the answers for Requirement 2 are not $1.42, $2.48, and $3.24. These answers do not consider the tax rate of 34%.

Explanation / Answer

Now the Interest = 41700*.05= 2085

Shares repurchased

Share price = 117000/3900 =30

Shares repurchases =41700/30 = 1390

Shares remainin =3900-1390 =2510

Rcession Normal Expansion EBIT 5644 8300 10209 Tax rate 1918.96 2822 3471.06 PAT 3725.04 5478 6737.94 Shares Outstading 3900 3900 3900 EPS 0.96 1.40 1.73

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