Kaelea, Inc., has no debt outstanding and a total market value of $69,000. Earni
ID: 2720282 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $69,000. Earnings before interest and taxes, EBIT, are projected to be $9,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $21,900 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,600 shares outstanding. Ignore taxes for this problem.
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. Round your answers to 2 decimal places (e.g., 32.16).)
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. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
Kaelea, Inc., has no debt outstanding and a total market value of $69,000. Earnings before interest and taxes, EBIT, are projected to be $9,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $21,900 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,600 shares outstanding. Ignore taxes for this problem.
Explanation / Answer
No Recapitalization Normal Expansion Recession EBIT 9000 10800 5850 No. of Shares 4600 4600 4600 Earning per share 1.956522 2.347826 1.271739 Percentage Change Increase in EPS on Expansion 0.391304 % Change=Change/Normal EPS*100 20 Decrease in EPS on Recession 0.684783 % Change=Change/Normal EPS*100 35 Taxes are Ignored, as The Question is Silent on the same. Current Market Value Of The Share=Market Value/No. OF Shares 15 Per Share Proceeds used to Buy Back Shares 21900 No of shares Brought Back 1460 No. Of Outstanding Shares after Recapitalization 3140 EPS after Recapitialization Normal Expansion Recession EBIT 9000 10800 5850 Less:Interest -1752 -1752 -1752 Earning after Interest 7248 9048 4098 EPS=Earning after Interest/No of Outstanding Shares 2.30828 2.881529 1.305096 Percentage Change Increase in EPS on Expansion 0.573248 % Change=Change/Normal EPS*100 24.83444 Decrease in EPS on Recession 1.003185 % Change=Change/Normal EPS*100 43.46026
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