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. (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) EPS Recession Normal Expansion a-2.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. Enter your answers as a percent.) Percentage changes in EPS Recession Expansion b-1.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).) EPS Recession Normal Expansion b-2.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. Enter your answers as a percent rounded to 2 decimal places (e.g. 32.16).) Percentage changes in EPS Recession Expansion

Explanation / Answer

## Recession = 21000-48000*0.04

Normal = 28000-48000*0.04

Expansion = 30800-48000*0.04

1    EBIT    No. of shares    EPS Recession 21000 20000 1.05 Normal 28000 20000 1.4 Expansion 30800 20000 1.54

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