Use the data in the paragraph below and the information in the table below to an
ID: 2632899 • Letter: U
Question
Use the data in the paragraph below and the information in the table below to answer the next two questions.
Wesley, Inc. is a levered firm with assets valued at $30,000 and $20,000 of debt issued at 10% interest. Wesley pays tax at the rate of 34%. The firm faces EBIT scenarios of recession and normal. {Note: EBIT= earnings before interest and tax, $Interest = dollar amount of interest owed on the debt, EBT = earnings before taxes, NI = net income, and EPS = earnings per share}
EBIT $ Interest EBT Taxes NI EPS
Recession $6000 $1.32
Normal $8000
23. What amount comes closest to the number of shares outstanding for Wesley?
a. 1,800
b. 2,000
c. 2,200
d. 2,400
e. 4,100
24. What amount comes closest to the earnings per share of Wesley in the Normal scenario?
a. $1.32
b. $1.67
c. $1.98
d. $0.91
e. $2.25
Explanation / Answer
23) Compute the number of shares outstanding:
EBIT is $6,000 in recession condition. To find the number of shares outstanding, deduct the interest expense, tax expense from EBIT and divide by the EPS.
Interest expense is 10% of debt.
Interest expense = 10% ($20,000)
= $2,000
EBT = EBIT - Interest expense = $6,000 - $2000
= $4,000
Net income = $4,000 - 34%($4,000)
= $2,640
Now, divide the net income by the EPS to find the number of shares outstanding.
Number of shares outstanding = $2,640 / $1.32
= 2,000 shares
Therefore, the number of outstanding common shares are 2,000. The correct option is (b) 2,000
------------------------------------------------------------------------------------------------------------------------------------------
24) Compute the Earnings per share:
EBIT is $8,000 in normal condition. To find the earnings per share, deduct the interest expense, tax expense from EBIT and divide by the number of shares outstanding.
Interest expense is 10% of debt.
Interest expense = 10% ($20,000)
= $2,000
EBT = EBIT - Interest expense = $8,000 - $2000
= $6,000
Net income = $6,000 - 34%($6,000)
= $3,960
Now, divide the net income by the number of shares outstanding.
EPS = $3,960 / 2,000
= $1.98
Therefore, the EPS in the normal condition is $1.98. The correct option is (c) $1.98
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.