Beckett, Inc., has no debt outstanding and a total market value of $ 165,000. Ea

Question

Beckett, Inc., has no debt outstanding and a total market value of $ 165,000. Earnings before interest and taxes, EBIT, are projected to be $ 15,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 33 percent higher. If there is a recession, then EBIT will be 66 percent lower. Beckett is considering an $ 66,000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,000 shares outstanding. Ignore taxes for this problem.

Earnings per share, EPS, for the recession, normal, and expansion scenarios before any debt is issued are $, $, and $, respectively(Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16)). If the economy enters a recession or expands, EPS will change bypercent orpercent, respectively(Negative amount should be indicated by a minus sign. Do not include the percent signs (%). Do not round interim calculations. Round your answers to 2 decimal places. (e.g., 32.16)).

Now assume that Beckett goes through with recapitalization. Earnings per share, EPS, for the recession, normal, and expansion scenarios are $, $, and $, respectively(Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16)). If the economy enters a recession or expands, EPS will change bypercent orpercent, respectively(Negative amount should be indicated by a minus sign. Do not round interim calculations. Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16)).

Beckett, Inc., has no debt outstanding and a total market value of $ 165,000. Earnings before interest and taxes, EBIT, are projected to be $ 15,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 33 percent higher. If there is a recession, then EBIT will be 66 percent lower. Beckett is considering an $ 66,000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,000 shares outstanding. Ignore taxes for this problem.

Explanation / Answer

a)If you ignore taxes in this problem and there is no debt outstanding:
Under Normal Economic Conditions
EPS = EBIT/shares outstanding = $15,000/3,000 = $5
Under Expansionary Times:
EPS = [EBIT x 1.66]/shares outstanding = $15,000(1.33)/3,000 = $6.65
Under a Recession:
EPS = [EBIT x (1-0.66)]/shares outstanding =$15,000(0.34)/3,000 = $1.7
% EPS going from Normal -> Expansion: ($6.65 - $5.00)/$5.00 = .33or 33%

% EPS going from Normal -> Recession: ($1.7 - $5.00)/$5.00 = -0.66 or -66%

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