Kaelea, Inc., has no debt outstanding and a total market value of $106,000. Earn
ID: 2646600 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $106,000. Earnings before interest and taxes, EBIT, are projected to be $9,700 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $30,600 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,300 shares outstanding. Assume Kaelea has a tax rate of 30 percent.
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).)
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.)
Requirement 1:Explanation / Answer
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).)
Normal
EPS = Net Income/Outstanding Share
EPS = 9700/5300
EPS = 1.83
Recession
EPS = Net Income/Outstanding Share
EPS = (9700-33%*9700)/5300
EPS = 1.23
Expansion
EPS = Net Income/Outstanding Share
EPS = (9700+22%*9700)/5300
EPS = 2.23
Answer
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.)
Recession
Percentage changes in EPS = (1.23-1.83)/1.83
Percentage changes in EPS = -33%
Expansion
Percentage changes in EPS = (2.23-1.83)/1.83
Percentage changes in EPS =22%
Answer
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).)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.