Question

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.

EPS | |||

Recession | $ | ||

Normal | $ | ||

Expansion | $ | ||

**
a-2.** Calculate the percentage changes in EPS when the
economy expands or enters a recession.

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.

EPS | |||

Recession | $ | ||

Normal | $ | ||

Expansion | $ | ||

**
b-2.** Given the recapitalization, calculate the percentage
changes in EPS when the economy expands or enters a recession.

Percentage changes in EPS | ||

Recession | % | |

Expansion | % | |

Answer #1

Part a1 and a2 | |||

Normal | Recesion | Expansion | |

EBIT | 36000 | 27000 | 43200 |

Interest | 0 | 0 | 0 |

EBT | 36000 | 27000 | 43200 |

Tax | 12600 | 9450 | 15120 |

EAT | 23400 | 17550 | 28080 |

O/S Shares | 6000 | 6000 | 6000 |

EPS | 3.9 | 2.925 | 4.68 |

% Change | 25% | 20% |

Part b1 and b2 | |||

Normal | Recesion | Expansion | |

EBIT | 36000 | 27000 | 43200 |

Interest | 9300 | 9300 | 9300 |

EBT | 26700 | 17700 | 33900 |

Tax | 9345 | 6195 | 11865 |

EAT | 17355 | 11505 | 22035 |

O/S Shares | 2125 | 2125 | 2125 |

EPS | 8.167059 | 5.414118 | 10.36941 |

% Change | -33.78% | 26.93% |

Please support and give the solution a thumbs up so the other students can acknowledge that the answer is correct and well explained. Thanks !! |

Castle, Inc., has no
debt outstanding and a total market value of $200,000. Earnings
before interest and taxes, EBIT, are projected to be $24,000 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 30 percent lower. The firm is
considering a debt issue of $70,000 with an interest rate of 7
percent. The proceeds will be used to repurchase shares...

Kaelea, Inc., has no debt outstanding and a total market value
of $75,000. Earnings before interest and taxes, EBIT, are projected
to be $9,400 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 24 percent higher. If
there is a recession, then EBIT will be 31 percent lower. The
company is considering a $22,500 debt issue with an interest rate
of 8 percent. The proceeds will be used to repurchase shares of...

Kaelea, Inc., has no debt outstanding and a total market value
of $57,000. Earnings before interest and taxes, EBIT, are projected
to be $8,200 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 22 percent higher. If
there is a recession, then EBIT will be 33 percent lower. Kaelea is
considering a $20,700 debt issue with an interest rate of 8
percent. The proceeds will be used to repurchase shares of stock....

Music City, Inc., has no debt outstanding and a total market
value of $220,000. Earnings before interest and taxes, EBIT, are
projected to be $40,000 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 20 percent
lower. The company is considering a $135,000 debt issue with an
interest rate of 4 percent. The proceeds will be used to repurchase
shares...

Sunrise, Inc., has no debt outstanding and a total market value
of $250,000. Earnings before interest and taxes, EBIT, are
projected to be $19,000 if economic conditions are normal. If there
is strong expansion in the economy, then EBIT will be 18 percent
higher. If there is a recession, then EBIT will be 30 percent
lower. The company is considering a $100,000 debt issue with an
interest rate of 8 percent. The proceeds will be used to repurchase
shares of...

Sunrise, Inc., has no debt outstanding and a total market value
of $220,000. Earnings before interest and taxes, EBIT, are
projected to be $42,000 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 30 percent
lower. The company is considering a $66,000 debt issue with an
interest rate of 6 percent. The proceeds will be used to repurchase
shares of...

Ghost, Inc., has no debt outstanding and a total market value of
$262,500. Earnings before interest and taxes, EBIT, are projected
to be $42,000 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 16 percent higher. If
there is a recession, then EBIT will be 27 percent lower. The
company is considering a $140,000 debt issue with an interest rate
of 5 percent. The proceeds will be used to repurchase shares of...

Ghost, Inc., has no debt outstanding and a total market value of
$220,100. Earnings before interest and taxes, EBIT, are projected
to be $38,000 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 23 percent lower. The
company is considering a $120,000 debt issue with an interest rate
of 5 percent. The proceeds will be used to repurchase shares of...

Ghost, Inc., has no debt outstanding and a total market value of
$200,000. Earnings before interest and taxes, EBIT, are projected
to be $24,000 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 30 percent lower. The
company is considering a $70,000 debt issue with an interest rate
of 7 percent. The proceeds will be used to repurchase shares of...

Minion, Inc., has no debt outstanding and a total market value
of $211,875. Earnings before interest and taxes, EBIT, are
projected to be $14,300 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 35 percent
lower. The company is considering a $33,900 debt issue with an
interest rate of 6 percent. The proceeds will be used to repurchase
shares of...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 4 minutes ago

asked 4 minutes ago

asked 5 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 12 minutes ago

asked 12 minutes ago