11-RAK, Inc., has no debt outstanding and a total market value of $240,000. Earn
ID: 2784352 • Letter: 1
Question
11-RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $48,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 20,000 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.)
11-RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $48,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 20,000 shares outstanding. Ignore taxes for this problem.
Explanation / Answer
Current Stock Price = Market Value / No. of shares = 240,000 / 20,000 = $12
With debt, no. of shares repurchased = 48,000 / 12 = 4,000
New outstanding no. of shares = 20,000 - 4,000
EPS = Profits / No. of shares
RAK Recession Normal Expansion EBIT 21000 28000 30800 EPS $ 1.05 $ 1.40 $ 1.54 % Change -25.00% 10.00% With Debt EBIT 21000 28000 30800 Interest 1920 1920 1920 Profits 19080 26080 28880 EPS $ 1.19 $ 1.63 $ 1.81 % Change -26.84% 10.74%Related Questions
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