CH 13 Drill Q1 Need help with Requirement 1 and 2. Kaelea, Inc., has no debt out

Question

CH 13 Drill Q1

Need help with Requirement 1 and 2.

Kaelea, Inc., has no debt outstanding and a total market value of $63,000. Earnings before interest and taxes, EBIT, are projected to be $8,600 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 percent higher. If there is a recession, then EBIT will be 34 percent lower. Kaelea is considering a $21,300 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,200 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.) Assume Kaelea goes through with recapitalization. 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).)

Explanation / Answer

Requirement1

(a)

Requirement 2

(a) Price per share = $63,000 / 4,200

= $15

Shares bought back = $21,300 / $15

= 1,420

Shares outstanding after recapitalisation = 4,200 - 1,420

= 2,780

Earning after interest payment = $8,600 - $21,300 * 8%

= $6,896

State of economy Calculation EPS Recession =$8,600 * (1 - 40%) * (1 - 34%) / 4,200 $0.81 Normal =$8,600 * (1 - 40%) / 4,200 $1.23 Expansion =$8,600 * (1 - 40%) * (1 + 21%) / 4,200 $1.49

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.