Castle, Inc., has no debt outstanding and a total market value
of $240,000. 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 20 percent
higher. If there is a recession, then EBIT will be 25 percent
lower. The firm is considering a debt issue of $155,000 with an
interest rate of 6 percent. The proceeds will be used to repurchase
shares of stock. There are currently 6,000 shares outstanding.
The firm has a tax rate 35 percent. Assume the
stock price remains constant.
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.
(A
negative answer should be indicated by a
minus sign. Do not round intermediate calculations.
Enter your answers as a percent rounded to the nearest
whole number, e.g., 32.)
|
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 |
$ |
|
| Normal |
$ |
|
| Expansion |
$ |
|
|
b-2. Given the recapitalization, calculate the percentage
changes in EPS when the economy expands or enters a recession.
(A negative answer 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 |
% |
|