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Calculate the percentage changes in eps

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Question - Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before Interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 ' percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an Interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.

a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.

a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.

b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.

b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

Reference no: EM133157993

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