Kaelea, Inc., has no debt outstanding and a total market value of $117,000. Earn
ID: 2769326 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $117,000. Earnings before interest and taxes, EBIT, are projected to be $8,300 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. Kaelea is considering a $41,700 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 3,900 shares outstanding. Assume Kaelea has a tax rate of 34 percent.
Requirement 1:
(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).) EPS Recession $ Normal $ 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.) %EPS Recession % Expansion %
Requirement 2:
Assume Kaelea goes through with recapitalization.
(a) Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) EPS Recession $ Normal $ 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 decimal places (e.g., 32.16).)
Explanation / Answer
Answer:Requirement 1:
Answer: Requirement 2:
Assume Kaelea goes through with recapitalization.
Share price=Equity / Share outstanding
=$117000/3900=$30
Share repurchased=Debt issued/Share price
=$41700/$30=1390 share
Interest payment=$41700*5%=2085
Particulars Recession Normal Expansion EBIT 5644.00 8300.00 10209.00 Less: interest 0.00 0.00 0.00 EBT 5644.00 8300.00 10209.00 Less: tax @34% 1918.96 2822.00 3471.06 Net income 3725.04 5478.00 6737.94 No of shares outstanding 3900.00 3900.00 3900.00 EPS 0.96 1.40 1.73 Change in EPS -32.00% 23.00%Related Questions
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