RAK, Inc., has no debt outstanding and a total market value of $200,000. Earning
ID: 2761595 • Letter: R
Question
RAK, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $65,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 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 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 assuming the company goes through with recapitalization. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b-1
Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.
alculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.
workings
No share brought back
=200000/1000 =20 per share
65000$/20 =3250 shares
No of share outstanding=10000-3250 =6750
Recession Normal Expansion Net Income 19500 26000 29120 Interest 0 0 0 Net Income After Interest 19500 26000 29120 No Of Shares 10000 10000 10000 1.95 2.60 2.91Related Questions
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