Beckett, Inc., has no debt outstanding and a total market value of $140,000. Ear

Question

Beckett, Inc., has no debt outstanding and a total market value of $140,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 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 30 percent lower. Beckett is considering a debt issue of $115,000 with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,000 shares outstanding. Ignore taxes for this problem.

a.1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.

Recession?

Normal?

a-2. Calculate the percentage changes in EPS when the economy expands or a recess.

Recession?

Expansion?

b.1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalize.

Recession?

Normal?

Expansion?

b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

Recession?

Expansion?

Explanation / Answer

number of outstanding shares are 7000 and the EBIT is $32,000. interest on debt capital is $6900

now the earinigs are $25,100

EPS in normal conditions= 251000/7000= $3.5857

befor debt issue it is = 32,000/7000= $4.571

in Recession= 22400/7000=$3.2

in Boom= 35,840/7000=$5.12

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