Question

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 of stock.
There are currently 8,000 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

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 $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....

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...

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...

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...

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....

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 4 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 8 minutes ago

asked 8 minutes ago

asked 8 minutes ago

asked 8 minutes ago

asked 8 minutes ago

asked 8 minutes ago