Castle,Inc, has no debt outstanding and a total market value of $240.000. Earnin
ID: 2657365 • Letter: C
Question
Castle,Inc, has no debt outstanding and a total market value of $240.000. Earnings before interest and taxes, EBIT, are projected to $26,000 ff 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 20 percent lower. The firm is considering a debt issue ors150,000 with an interest rate on percent. The proceeds will be used to repurchase shares of stock. There are currently 15.000 shares outstanding. The firm has a tax rate 35 percent. Assume the stock price remains constant a-1. Caiculate eamings per share (EPS) under each of the three economic scenartos before any debt is issued. (Do not round Intermedlate calculations and round your enswers to 2 decimal places, e.g, 32.16.) EPS Recession Normal Expansion a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative onswer shouid be Indicated by e minus sign. Do not round Intermediate calculations. Enter your answers as a percent rounded to the nearest whole number, e.g 32) Percentage changes in EPS Recession Expansion b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes tnrougn with recapitalization (Do not round Intermediate celculations and round your onswers to 2 declmal pleces e.g32.16) EPS Recession Normal Expansion re to searghExplanation / Answer
Earnings per share or EPS, is the amount of net income a company generates for each share of common stock during an accounting period.EPS is a financial ratio, which divides net earnings available to common shareholders by the total outstanding shares over a certain period of time.
Calculation of EPS are as follows:
Normal
Expansion
Recession
EBIT
26000
30680
20800
LESS
INTEREST
12000
12000
12000
EBT
14000
18680
8800
LESS
TAX(35%)
4900
6538
3080
EAT
9100
12142
5720
NO OF OUTSTANDING SHARES
15000
15000
15000
EPS( EAT/NO OF OUTSTANDING SHARES)
$0.61
$0.81
$0.38
Calculation of Change in EPS
Change in EPS indicate how quickly the EPS is changing and whether the company is becoming more profitable or less profitable for shareholders. Once you know how to calculate EPS for a company, you can calculate change in EPS . First, subtract the initial EPS from the revised EPS. Second, divide the change in EPS by the initial EPS. Finally, multiply the result by 100 to calculate percentage change in EPS.
In the given case
% change in EPS(RECESSION) = (REVISED EPS-INITIAL EPS)/INITIAL EPS*100
=(0.38-0.61)/0.61*100
= -38%
% change in EPS(EXPANSION) = (REVISED EPS-INITIAL EPS)/INITIAL EPS*100
= (0.81-0.61)/0.61*100
=33%
WHEN COMPANY GOES WITH RECAPITALIZATION
In that case $150000 is used to repurchase shares of stock .Firstly we have to calculate MPS of shares
MPS= MARKET VALUE OF SHARES/NO OF OUTSTANDING SHARES
= $240000/15000
= $16
SHARES TO BE REPURCHASED = TOTAL AMOUNT OF DEBT/MPS
= $150000/16
= 9375 SHARES
TOTAL NO OF SHARES OUTSTANDING= 15000+9375= 24375
Hence the revised EPS with recapitalization are as follows
Normal
Expansion
Recession
EBIT
26000
30680
20800
LESS
INTEREST
12000
12000
12000
EBT
14000
18680
8800
LESS
TAX(35%)
4900
6538
3080
EAT
9100
12142
5720
NO OF OUTSTANDING SHARES
24375
24375
24375
EPS
$0.37
$0.50
$0.23
Normal
Expansion
Recession
EBIT
26000
30680
20800
LESS
INTEREST
12000
12000
12000
EBT
14000
18680
8800
LESS
TAX(35%)
4900
6538
3080
EAT
9100
12142
5720
NO OF OUTSTANDING SHARES
15000
15000
15000
EPS( EAT/NO OF OUTSTANDING SHARES)
$0.61
$0.81
$0.38
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