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Calculate earnings per share and eps

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1. EBIT, Taxes, and Leverage.  Kaelea, Inc. has no debt outstanding and a total market value of $90,000.   Earnings before interest and taxes, EBIT, are projected to be $8,000 if the economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 20 percent higher.  If there is a recession, then EBIT will be 35 percent lower.  Kaelea is considering a $34,000 debt issue with a 6 percent interest rate.  The proceeds will be used to repurchase shares of stock.  There are currently 3,600 shares outstanding (Complete a. & b. assuming Kaelea has a tax rate: 35%).

  1. 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.
  2. Repeat part (a) assuming that Kaelea goes through with recapitalization.  What do you observe?

Reference no: EM13197231

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