Pendergast, Inc., has no debt outstanding and a total market value of $130,000.
ID: 2654482 • Letter: P
Question
Pendergast, Inc., has no debt outstanding and a total market value of $130,000. Earnings before interest and taxes, EBIT, are projected to be $9,600 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 percent higher. If there is a recession, then EBIT will be 34 percent lower. Pendergast is considering a $38,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,200 shares outstanding. Ignore taxes for this problem.
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. Round your answers to 2 decimal places (e.g., 32.16).)
Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (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. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
rev: 11_12_2013_QC_40178, 05_12_2014_QC_48891
Requirement 1:Explanation / Answer
Pendergast, Inc., has no debt outstanding and a total market value of $130,000. Earnings before interest and taxes, EBIT, are projected to be $9,600 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 percent higher. If there is a recession, then EBIT will be 34 percent lower. Pendergast is considering a $38,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,200 shares outstanding. Ignore taxes for this problem. EBT = Earnings Before Taxes (after Interest and Depreciation) Requirement 1: (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).) EPS = EBT/No. of shares outstanding EPS Recession $ 1.22 Normal $ 1.85 Expansion $ 2.23 (b) 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. Round your answers to 2 decimal places (e.g., 32.16).) %EPS Recession % -34.00 Expansion % 21.00 Requirement 2: Assume Pendergast goes through with recapitalization. (a) Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Interest on Debt issue = $ 38,000 * 6% = 2,280 $ Revised EBT = 9,600 - 2,280 = 7,320 $ No. of shares earlier prior to issue = 5,200 Share Value = $ 1,30,000 Face Value per share = 25 Amount of fresh issue = $ 38,000 Assuming same face value, repurchase of shares done = 1,520 Total no. of shares outstanding post repurchase = 6,720 EPS Recession $ 0.72 Normal $ 1.09 Expansion $ 1.32 (b) 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).) %EPS Recession % -34.00 Expansion % 21.00 rev: 11_12_2013_QC_40178, 05_12_2014_QC_48891
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