Kaelea, Inc., has no debt outstanding and a total market value of $130,000. Earn
ID: 2730084 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $130,000. Earnings before interest and taxes, EBIT, are projected to be $9,600 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 $38,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,200 shares outstanding. Assume Kaelea has a tax rate of 35 percent. Requirement 1: (a) 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).)
EPS
Recession $
Normal $
Expansion $
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).)
Requirement 2:Explanation / Answer
No Debt Outstanding i.e Before capital reconstruction
EPS = Net profit available to equity shareholders / No of shares outstanding
Net profit available to equity shareholders = Net profit-prefered dividend-Tax
Particulars Normal Expansion(+30%) Recession(-34%) EBIT 9600 12480 6336 Less:Tax @35% 3360 4368 2218 Net Income 6240 8112 4118 No of shars outstanding 5200 5200 5200 EPS 1.2 1.56 0.7919Related Questions
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