Calculate earnings per share for castle inc

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Reference no: EM132913870

Castle, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 20 percent lower. The firm is considering a debt issue of $90,000 with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. The firm has a tax rate 35 percent. Assume the stock price remains constant.

Problem 1: Calculate the percentage changes in EPS when the economy expands or enters a recession.

Problem 2: Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.

 

Reference no: EM132913870

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