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Compute earnings per share (EPS) under each of the three economic scenarios

A firm has no outstanding debt and a total market value of $200,000. Earnings before interest and taxes (EBIT) are projected to be $25,000 if economic conditions are normal. If there is a strong expansion, EBIT is expected to increase to $35,000, and if there is a recession the firm\'s EBIT is expected to decline to $10,000. The firm is considering a $70,000 debt issue with a 6 percent interest rate, where the proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Ignore taxes.

a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters into a recession.

b. Repeat part (a) assuming that the firm goes through with the recapitalization.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9162677

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