Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earni
ID: 2714728 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 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 31 percent lower. Kaelea is considering a $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assume Kaelea has a tax rate of 40 percent.
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.)
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. (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).)
Please show how you get to your answers. Thank you!
Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 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 31 percent lower. Kaelea is considering a $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assume Kaelea has a tax rate of 40 percent.
Explanation / Answer
Solution:
(a.)
(b.)
Earning per Share - EPS EBIT Less: Tax ( 40 % of EBIT ) Earnings After Tax EPS = Earnings After Tax / Shares outstanding Recession ( 69% * 9,400) 6,486 2594.40 3891.60 0.78 Normal 9,400 3760.00 5640.00 1.13 Expansion ( 124% * 9,400) 11,656 4662.40 6993.60 1.40Related Questions
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