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Kaelea, Inc., has no debt outstanding and a total market value of $69,000. Earnings before interest and taxes, EBIT, are projected to be $9,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. The company is considering a $21,900 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,600 shares outstanding. Assume the company has a tax rate of 40 percent.
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued
| EPS | |
| Recession | $ |
| Normal | $ |
| Expansion | $ |
b. Calculate the percentage changes in EPS when the economy expands or enters a recession
| %?EPS | |
| Recession | % |
| Expansion | % |
Assume the company goes through with recapitalization.
c. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization
| EPS | |
| Recession | $ |
| Normal | $ |
| Expansion | $ |
| %?EPS | |
| Recession | % |
| Expansion | % |
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