Pendergast, Inc., has no debt outstanding and a total market value of $250,000.
ID: 2635680 • Letter: P
Question
Pendergast, Inc., has no debt outstanding and a total market value of $250,000. 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 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Pendergast has a tax rate of 35 percent.
Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Round your answers to 2 decimal places. (e.g., 32.16))
Calculate the percentage changes in EPS when the economy expands or enters a recession.(Negative amounts should be indicated by a minus sign.)
Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.(Round your answers to 2 decimal places. (e.g., 32.16))
Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
Pendergast, Inc., has no debt outstanding and a total market value of $250,000. 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 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Pendergast has a tax rate of 35 percent.
Explanation / Answer
A1
Recession
Normal
Expansion
EBIT
$ 29,400
$ 42,000
$ 49,560
(-) Tax
$ 10,290
$ 14,700
$ 17,346
Net Income
$ 19,110
$ 27,300
$ 32,214
No. of shares
10000
10000
10000
EPS
$ 1.91
$ 2.73
$ 3.22
A2
Percentage Changes in EPS:
Recession = 1.91 / 2.73
Recession
Normal
Expansion
EBIT
$ 29,400
$ 42,000
$ 49,560
(-) Tax
$ 10,290
$ 14,700
$ 17,346
Net Income
$ 19,110
$ 27,300
$ 32,214
No. of shares
10000
10000
10000
EPS
$ 1.91
$ 2.73
$ 3.22
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