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XYZ is currently an all-equity firm with a total market value of $1,000,000. Earnings before interest and taxes (EBIT) are projected to be $80,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 30% lower. The three states of the economy are equally likely. XYZ is considering a (perpetual) debt issue of $150,000 with an interest (i.e., coupon) rate of 6%. The proceeds will be used to repurchase shares of stock. There are currently 25,000 shares outstanding. Suppose that XYZ pays no taxes (that is, the tax rate is 0%).
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.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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