Money, Inc., has no debt outstanding and a total market value of $275,000. Earni

Question

Money, Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes. EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. Money is considering a $99,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Calculate earnings per share. EPS. under each of the three economic scenarios before any debt is issued. Calculate the percentage changes in EPS when the economy expands or enters a recession. Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

Explanation / Answer

EBIT 12600 21000 26250 Number of shares 5000 5000 5000 EBIT/Number of shares 2.52 4.2 5.25 % change in EPS -40.00% 25.00% Share price Market value/Number of shares 55 Debt Issued 99000 No . Of shares bought back 1800 No . Of shares remaining 3200 Interest 7920 EBIT 12600 21000 26250 Interest 7920 7920 7920 EBIT- Interest 4680 13080 18330 No . Of shares remaining 3200 3200 3200 EPS 1.46 4.09 5.73 % change -64.22% 40.14%

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