RAK, Inc., has no debt outstanding and a total market value of $150,000. Earning
ID: 2782339 • Letter: R
Question
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $95,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 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 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. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your 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. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $95,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for this problem.
Explanation / Answer
Without taxes and debt, EBIT = Profits
EPS = Profits / No. of shares
Without debt, there are 6,000
With debt, interest = 95,000 x 8% = 7,600
Price per share = 150,000 / 6,000 = 25
With 95,000, no. of shares repurchased = 95,000 / 25 = 3,800
Outstanding no. of shares after repurchase = 6,000 - 3,800 = 2,200
RAK Recession Normal Expansion EBIT 27000 36000 41400 EPS $ 4.50 $ 6.00 $ 6.90 % Change -25.00% 15.00% With Debt EBIT 27000 36000 41400 Interest 7600 7600 7600 Profits 19400 28400 33800 EPS $ 8.82 $ 12.91 $ 15.36 % Change -31.69% 19.01%Related Questions
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