Reference no: EM132481523
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. Ignore taxes for this problem.
A-1. Calculate the earnings per share, EPS, under each of the three economic scenarios before any debt is issued
EPS
Recession $ ?
Normal $ ?
Expansion $ ?
A-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.
Percentage changes in EPS
Recession %?
Expansion %?
B-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes with recaptalization
EPS
Recession $ ?
Normal $ ?
Expansion $ ?
B-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.
Percentage changes in EPS
Recession %?
Expansion %?
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