Question

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
stock. There are currently 5,000 shares outstanding. Ignore taxes
for this problem.

**a.** 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 | $ |

**b.** 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 and enter your answers as a percent
rounded to the nearest whole number, e.g., 32.)**

%ΔEPS | |

Recession | % |

Expansion | % |

Assume the company goes through with recapitalization.

**c.** Calculate earnings per share, EPS, under each
of the three economic scenarios after the recapitalization.
**(Do not round intermediate calculations and round your
answers to 2 decimal places, e.g., 32.16.)**

EPS | |

Recession | $ |

Normal | $ |

Expansion | $ |

**d.** 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 and enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)**

%ΔEPS | |

Recession | % |

Expansion | % |

Answer #1

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...

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...

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...

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...

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....

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...

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