Money, Inc., has no debt outstanding and a total market value of $240,000. Earni

Question

Money, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Money is considering a $140,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 12,000 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 and round your final 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 assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  

  

Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  

Money, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Money is considering a $140,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 12,000 shares outstanding. Ignore taxes for this problem.

Explanation / Answer

Answer:

a 1 (In$)

a. 2

Percentage changes in EPS when economy expands = Change in EPS / Normal EPS * 100 = 2.61-2.33 / 2.33 * 100

= 12.00% (approx)

Percentage changes in EPS when economy enters into recession= Change in EPS / Normal EPS * 100 = 2.33 - 1.75 / 2.33 * 100

= - 25.00% (approx)

b 1(In $)

b 2

Percentage changes in EPS when economy expands = Change in EPS / Normal EPS * 100 = 4.59- 3.92 / 3.92 * 100

= 17.14% (approx)

Percentage changes in EPS when economy enters into recession= Change in EPS / Normal EPS * 100 = 3.92-2.52 / 3.92 * 100

= - 35.71% (approx)

(a) EBIT/EBT (b) No. of shares EPS (a) /(b) Recession (28,000 -25%) 21,000 12000 1.75 Normal 28,000 12000 2.33 Expansion (28,000 + 12%) 31,360 12000 2.61

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