Reference no: EM131072105
RAK, Inc., has no debt outstanding and a total market value of $220,000. 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 15 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $120,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. RAK has a tax rate of 35 percent.
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)
Recession?
Normal?
Expansion?
a-2: Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places)
Recession (-19.92)
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)
Recession?
Normal?
Expansion?
b-2: Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places)
Recession (-31.71)
Expansion (23.78)
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