1. 12.50 points Kaelea, Inc, has no debt outstanding and a total market value of
ID: 2758228 • Letter: 1
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1. 12.50 points Kaelea, Inc, has no debt outstanding and a total market value of $82.000. Eamings before interest and xes, EBIT, are projected to be $8,500 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $28,200 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,100 shares outstanding. Ignore taxes for this problem. Requirement t: (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).) Expansion (b) 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 decimaf places (e.g.. 32.16).) Recession Requirement 2:Explanation / Answer
a) Normal Expansion Recession EBIT 8,500 10,200 5,525 Shares outstanding 4,100 4,100 4,100 EPS 2.07 2.49 1.35 b) Change in EPS Recession -35% (1.35-2.07)/2.07 Expansion 20% (2.49-2.07)/2.07 2) Normal Expansion Recession EBIT 8,500 10,200 5,525 Interest 1,974 1,974 1,974 Shares outstanding 4,100 4,100 4,100 Less: shares bought 1,410 1,410 1,410 net share outstanding 2,690 2,690 2,690 PBT 6,526 8,226 3,551 EPS 2.43 3.06 1.32 Shares bought=82000/4100 20 28200/20 1410 Shares b) Change in EPS Recession -46% (1.32-2.43)/2.43 Expansion 26% (3.06-2.43)/2.43
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