Reference no: EM131911134
Castle, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 25 percent lower. The firm is considering a debt issue of $125,000 with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes for this problem.
a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Recession $
Normal $
Expansion $
EPS
a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to the nearest whole number, e.g., 32.)
Percentage changes in EPS
Recession %
Expansion %
b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Recession $
Normal $
Expansion $
EPS
b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Percentage changes in EPS
Recession %
Expansion %
Firm waits two years before deciding whether to drill
: What is the project’s net present value in today’s dollars, if the firm waits two years before deciding whether to drill?
|
Prepare the inventories section of the balance sheet
: Sales salaries and commissions $110,000; Prepare the inventories section of the balance sheet for December 31, 2009 for Danube
|
Casual surf concept to encompass surf lifestyle for home
: Two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.”
|
What is the value of the company if it chooses to retire
: What is the value of the company if it chooses to retire all of its debt and become an unlevered firm?
|
Calculate earnings per share-eps
: Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.
|
Discuss the key activities in the revenue
: Discuss the key activities in the revenue, conversion, and expenditure cycles. What does an entity-relationship diagram represent
|
What amount of replacement reserves
: You have projected your depreciation expense to be $1,000,000 in the next fiscal year with year-end accumulated depreciation balances being $5,000,000.
|
The chief drawback to residual dividend policy
: What do you think would be the chief drawback to a residual dividend policy?
|
What amount of short-term cash reserves
: If annual budgeted cash expenses are $48,000,000, what amount of short-term cash reserves should be targeted?
|