Kaelea, Inc., has no debt outstanding and a total market value of $81,000. Earni

Question

Kaelea, Inc., has no debt outstanding and a total market value of $81,000. Earnings before interest and taxes, EBIT, are projected to be $9,800 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. Kaelea is considering a $23,100 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,400 shares outstanding. Assume Kaelea has a tax rate of 40 percent.

Requirement 1:

(a) Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Recession $

Normal $

Expansion $

(b) Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

%EPS

Recession %

Expansion 23 %

Requirement 2:

Assume Kaelea goes through with recapitalization.

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

Recession $

Normal $

Expansion $

(b) Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

%EPS

Recession %

Expansion 28.35 %

Explanation / Answer

Kaelea, Inc., has no debt outstanding and a total market value of $81,000. Earni

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