Money, Inc., has no debt outstanding and a total market value of dollar 275,000.

Question

Money, Inc., has no debt outstanding and a total market value of dollar 275,000. Earnings before interest and taxes, EBIT, are projected to be dollar 21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. Money is considering a dollar 99,000 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. Money has a tax rate of 35 percent. 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 final answers to 2 decimal places. 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.) Assume that the company goes through with recapitalizatio. Calculate earnings per share (EPS) under each of the three economic scenarios. (Do not round intermediate calculations and round your final answers to 2 decimal places. Given the recapitalization, calculate the percentage changes inEPS when the economy expands or enters a recession. (Negtive amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places.

Explanation / Answer

answer:

a-1:

recession = 1.63

normal = 2.73

expansion = 3.412

.

.

a-2

recession % = - 40%

expansion % = + 25%

.

b1

normal =2.65

recession = .95

expansion = 3.72

.

b-2

recession = - 64.15%

expansion = + 40.37%

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.