Questions by larkin.abraham - Page 15
Kaelea, Inc., has no debt outstanding and a total market value of $81,000. Earnings before interest and taxes, EBIT, are projected to be $9,800 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. The company is considering a $23,100 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,400 shares outstanding. Assume Kaelea has a tax rate of 40 percent.Required: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.c. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.d. Calculate the percentage changes in EPS when the economy expands or enters a recession.