Money, Inc., has no debt outstanding and a total market value of $135,000. Earni

Question

Money, Inc., has no debt outstanding and a total market value of $135,000. Earnings before interest and taxes, EBIT, are projected to be $13,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 60 percent lower. Money is considering a $54,000 debt issue with a 3 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem. Required:(a) Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not include the dollar signs ($) or percent signs (%). Negative amount should be indicated by a minus sign. Do not round interim calculations. Round EPS to 2 decimal places. (e.g., 32.16)) EPS %?EPS $ Recession- ? $ Normal -? $ Expansion-? ------------------------------------------------------------------------------- (b) Calculate earnings per share, EPS, under each of the three economic scenarios assuming the company goes through with the recapitalization. Also calculate the percentage changes in EPS when the economy expands or enters a recession assuming that Money goes through with recapitalization. (Do not include the dollar signs ($) or percent signs (%). Negative amount should be indicated by a minus sign. Do not round interim calculations. Round your answers to 2 decimal places. (e.g., 32.16)) EPS %?EPS $ Recession- ? $ Normal -? $ Expansion-?

Explanation / Answer

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

Normal EPS = $300,000 / 10,000 = $30
Expansion EPS = $30 x 1.3 = $39
RecessionEPS = $30 x 0.4 = $12

<<<calculate the percentage changes in EPS when theeconomyexpands or enters a recession.>>>

No calculation is needed since the answer was already given.

the percentage changes in EPS when the economy expands = + 30%

the percentage changes in EPS when the economy enters a recession = - 60%

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