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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
b. Calculate the percentage changes in EPS when the economy expands or enters a recession
Assume the company goes through with recapitalization.
c. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization
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