intermediate calculations and enter your answers as a percent rounded to 2 decim

Question

intermediate calculations and enter your answers as a percent rounded 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. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. Given the recapitalization, calculate the pecentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. a- Recession EPS Normal EPS Expansion EPS 1.60 2.13 2.51 1. a-Recession percentage change in 2. -24.88 % EPS Expansion percentage change in EPS 17.84 % 2.33 3.56 4.44 b- 1. Recession EPS Normal EPS Expansion EPS Recession percentage change in EPS Expansion percentage change in 2. 34.55 % 24.72 % FPS

Explanation / Answer

Given, Market Value =$220000
   EBIT = $36000
   No. of shares currently outstnading = 11000
a1) EBITr (under recession) = 36000*0.75    (25% decrease in EBIT)
      = $27000
   EPSr (under recession)= 27000/11000
   = $2.45

EBIT (under normal condition) = $36000
EPS under normal condition = 36000/11000
= $3.27
  
      EBITe(under expansion) = 36000*1.18 (18% increase)
   = $42480
   EPSe(under expansion) = 42480/11000
      = $3.86


a2. Percentage change
      Recession percentage change in EPS = (Recession EPS/Normal EPS) - 1
= (2.45/3.27)-1
   = -25.00%
( if we use excel and no round off of intermediate calculation is done then the exact answer would be -25.00%)

Expansion percentage change in EPS = (Expansion EPS/Normal EPS) - 1
      = (3.86/3.27)-1
      = 18%
( if we use excel and no round off of intermediate calculation is done then the exact answer would be -18.00%)

b1 Market Value = $220000

No.of shares outstanding = 11000
Price of each shares = 220000/11000 = $20

Total debt issued = $125000 which is used to repurchase shares worth $125000
No.of shares repurchased = 125000/20
                                               =6250
Shares outstanding post repurchase = 11000-6250 = 4750

Refere to the calculation in the excel for the answer for b1 and b2.

Note : No intermediate answers are rounded off. Only the final answer is rounded to 2 decimal places. EPS calculated is also not rounded off for calculation percentage change

Parameter Recession Normal Expansion EBIT 27000 36000 42480 Interest 10000 10000 10000 EBT 17000 26000 32480 No. of shares outstanding after repurchse 4750 4750 4750 EPS 3.58 5.47 6.84 Percentage change -34.62% NA 24.92%

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