lems Seved Help Save& Exit Submit Check my work Castle, Inc., has no debt outsta
ID: 2824520 • Letter: L
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lems Seved Help Save& Exit Submit Check my work Castle, Inc., has no debt outstanding and a total market value of $150000. Earnings before interest and taxes, EBIT, are projected to be $36,000 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 25 percent lower. The firm is considering a debt issue of $95,000 with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 outstanding. Ignore taxes for this problem. shares 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 pla ces,e.g..32.16.) EPS Recession Normal Expansion a-2. Calculate the percentage 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. Enter your answers as a percent rounded to the nearest whole number, e.g, 32.) Percentage changes in EPS Recession Expansion 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.) 9Explanation / Answer
A-1
Normal
Expansion
recession
EBIT
36000
41400
27000
less interest
0
0
0
EBT
36000
41400
27000
less taxes
0
0
0
EAT
36000
41400
27000
no of shares
6000
6000
6000
EPS = EAT/ no of shares
6
6.9
4.5
A-2 % change in EPS when economy enter into recession or expands
change in EPS when economy enteres into expansion
(6.9-6)/6
15%
change in EPS when economy enteres into recession
(4.5-6)/6
-25%
B-1
Normal
Expansion
recession
EBIT
36000
41400
27000
less interest
7600
7600
7600
EBT
28400
33800
19400
less taxes
0
0
0
EAT
28400
33800
19400
no of shares
2200
2200
2200
EPS = EAT/ no of shares
12.91
15.36
8.82
value of stock
150000
no of shares
6000
per share price
150000/6000
25
no of shares to be purchased
95000/25
3800
no of shares outstanding
6000-2800
2200
B-2 % change in EPS when economy enter into recession or expands
change in EPS when economy enteres into expansion
(15.36-12.91)/12.91
18.98%
change in EPS when economy enteres into recession
(8.82-12.91)/12.91
-31.68%
A-1
Normal
Expansion
recession
EBIT
36000
41400
27000
less interest
0
0
0
EBT
36000
41400
27000
less taxes
0
0
0
EAT
36000
41400
27000
no of shares
6000
6000
6000
EPS = EAT/ no of shares
6
6.9
4.5
A-2 % change in EPS when economy enter into recession or expands
change in EPS when economy enteres into expansion
(6.9-6)/6
15%
change in EPS when economy enteres into recession
(4.5-6)/6
-25%
B-1
Normal
Expansion
recession
EBIT
36000
41400
27000
less interest
7600
7600
7600
EBT
28400
33800
19400
less taxes
0
0
0
EAT
28400
33800
19400
no of shares
2200
2200
2200
EPS = EAT/ no of shares
12.91
15.36
8.82
value of stock
150000
no of shares
6000
per share price
150000/6000
25
no of shares to be purchased
95000/25
3800
no of shares outstanding
6000-2800
2200
B-2 % change in EPS when economy enter into recession or expands
change in EPS when economy enteres into expansion
(15.36-12.91)/12.91
18.98%
change in EPS when economy enteres into recession
(8.82-12.91)/12.91
-31.68%
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