Tackett, Inc., has no debt outstanding and a total market value of $159,000. Ear

Question

Tackett, Inc., has no debt outstanding and a total market value of $159,000. 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, the EBIT will be 31.8 percent higher. If there is a recession, then EBIT will be 63.6 percent lower. Tackett is considering an $64,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 share outstanding. Ignore taxes for this problem, all answers should be rounded to 2 decimal places.

(a). Earnings per share, EPS, for the recession, normal, and expansion scenarios before any debt is issued are $ ________, $_______, and $________, respectively. If the economy enters a recession or expands, EPS will change by ________ percent, or ________ percent, respectively. (do not round interim calculations)

(b). Now assume that Tackett goes through with recapitalization. Earnings per share, EPS, for the recession, normal, and expansion scenarios are $ _________, $__________, and $__________, respectively. If the economy enters a recession or expands, EPS will change by _________ percent or _________ percent respectively. (Do not round interim calculations).

Explanation / Answer

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Please find the answer as follows;

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Recession Normal Expansion EBIT 5460 15000 19770 Interest 0 0 0 Net Income 5460 15000 19770 EPS 2.18 6.00 7.91 %Change in EPS -63.60% 0.00 31.80%




Recession Normal Expansion EBIT 5460 15000 19770 Interest (64000*.05) 3840 3840 3840 Net Income 1620 11160 15930 EPS 1.08 7.47 10.66 %Change in EPS -85.48% 0.00 42.74%

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