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You are the CEO of Shah Corporation. The firm has no debt outstanding. Total market value of the firm is $2,000,000. Earnings before interest and taxes, EBIT, are projected to be $244,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 30% lower. Diamond 11 Corporation is considering a $850,000 debt issue with a 6% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 15,000 shares outstanding. The tax rate is 35%. Based on the given information, please answer questions a and b.
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 a recession.
b) Repeat part (a) assuming that the company goes through with recapitalization. What do you observe?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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