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

Question

Beckett, 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 10 percent higher. If there is a recession, then EBIT will be 25 percent lower. Beckett is considering a debt issue of $48,000 with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 20,000 shares outstanding. Ignore taxes for this problem.

a-1.

Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued

Beckett, 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 10 percent higher. If there is a recession, then EBIT will be 25 percent lower. Beckett is considering a debt issue of $48,000 with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 20,000 shares outstanding. Ignore taxes for this problem.

Explanation / Answer

Normal expansion recession total market value of shares 240000 EBIT 28000 30800 21000 no of shares outstanding 20000 48000*4% interest 1920 1920 1920 per share market value 12 earning after tax 26080 28880 19080 EPS after debt issued no of shares remaining 16000 16000 16000 debt issued 48000 EPS after debt issued 1.63 1.805 1.1925 per share value 12 share repurchased 4000 EBIT 28000 30800 21000 shares remaining 16000 no of shares 20000 20000 20000 EPS before any debt issue 1.4 1.54 1.05

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