Kaelea, Inc., has no debt outstanding and a total market value of $130,000. Earn
ID: 2730088 • 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.
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).)
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.
Explanation / Answer
Requirement1:
a & b.
Eps = Net profits available to equity shareholders/no of shares outstanding
Requirement 2:EPS after recapitalisation
Computation of Share price = Equity/share outstanding
=130000/5200
=$25
Shares repurchased =debt/share price
=38000/25=1520 shares
Debt issue =$38000 @6% p.a
Prefered interest = $2280p.a
Particulars Normal($) Expansion(+21%)$ Recession(-34%)$ EBIT 9600 11616 6336 Less:prefered dividend 0 0 0 Tax @35% 3360 4065.6 2217.6 Net Income 6240 7550.4 4118.4 No of shares outstanding 5200 5200 5200 EPS 1.2 1.45 0.79 B.%chane in EPS (1.45-1.2)/1.2*100=20.833 (0.79-1.2)/1.2*100=-34.167Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.