RAK, Inc., has no debt outstanding and a total market value of $240,000. Earning
ID: 2763737 • Letter: R
Question
RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 30 percent lower. RAK is considering a $80,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 15,000 shares outstanding. Ignore taxes for this problem.
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.)
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.)
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.)
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. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 30 percent lower. RAK is considering a $80,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 15,000 shares outstanding. Ignore taxes for this problem.
Explanation / Answer
To calculate EPS or earning per share, the following steps are required
To calculate net income
To ascertain outstanding equity shares
The net income is divided by equity shares outstanding to calculate EPS
Given in the problem for calculation of EPs before debt is issued
Net income is $32,000 in normal condition
Net income is 15% more in expansion that is $36,800
Net income is 30% less in recession that is $22,400
The outstanding shares is 15000
The EPS calculations are
The percentage share in EPS is calculated for recession is given below
= (EPS in recession - EPS in normal) /EPS in normal *100
=( 1.49 - 2.13) /2.13 *100
= -0.63/2.13 *100
= - 29.58% ( rounding off 2 decimals)
The percentage share in EPS is calculated for expansion is given below
= (EPS in expansion - EPS in normal) /EPS in normal *100
=( 2.45 - 2.13) /2.13 *100
= 0.32/2.13 *100
= 15.02% ( rounding off 2 decimals)
To calculate EPS after capitaziation
1) to calculate the interest cost which is 7% of $80,000 is $5,600
2) the net income will be EBIT minus interest that is $32000 - $5,600 is $26,400 for normal scenario
3) the net income for recession is 30% less of $26,400 that is $18,480
4) the income for expansion is 15% more of $26,400 that is $30,360
5) the per share value is $2,40,000 / 15000 is $16
5 ) the shares purchased for $80,000 will be (80,000 / 16) is 5000
6) the net shares outsstanding is 15000 - 5000 is 10,000 shares
the revised EPS calculation for recaptixation is given below
The percentage share in EPS is calculated for recession is given below
= (EPS in recession - EPS in normal) /EPS in normal *100
=( 1.85 - 2.64) /2.64 *100
= -0.79/2.64 *100
= - 29.92% ( rounding off 2 decimals)
The percentage share in EPS is calculated for expansion is given below
= (EPS in expansion - EPS in normal) /EPS in normal *100
=( 3.04 - 2.64) /2.64 *100
= 0.402.64 *100
= 15.15% ( rounding off 2 decimals)
particulars normal recession expansion net income 32000 22400 36800 outstanding shares 15000 15000 15000 EPS 2.13 1.49 2.45Related Questions
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