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Capital structure and the effect of leverage on earnings

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Reference no: EM133057356

Walker, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is an expansion in the economy, then EBIT will be $29,000. If there is a recession, then EBIT will be $12,000. Walker is considering a $66,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock (this is known as recapitalization). There are currently 3,000 shares outstanding. Walker has a market-to-book ratio of 1.0.

Topic: Capital Structure and the Effect of Leverage on Earnings

-What is the current price per share for the firm's outstanding equity? (Round answer to 2 decimal places)

-Calculate earnings per share (EPS) under normal economic conditions before the firm issues any debt. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Calculate earnings per share (EPS) under the economic expansion before the firm issues any debt. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Calculate earnings per share (EPS) under the economic recession before the firm issues any debt. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Calculate the percentage change in EPS under the economic expansion scenario (relative to a normal economy) before any debt is issued. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate the percentage change in EPS under the economic recession scenario (relative to a normal economy) before any debt is issued. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate earnings per share (EPS) under normal economic conditions assuming that the firm goes through with the recapitalization. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Calculate earnings per share (EPS) under the economic expansion assuming that the firm goes through with the recapitalization. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Calculate earnings per share (EPS) under the economic recession assuming that the firm goes through with the recapitalization. Assume no taxes. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Repeat part (g) assuming a corporate tax rate of 35%. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Repeat part (h) assuming a corporate tax rate of 35%. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Repeat part (i) assuming a corporate tax rate of 35%. (Round answers to 2 decimal places. Do not round intermediate calculations)

-Calculate return on equity (ROE) under normal economic conditions before the firm issues any debt. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate return on equity (ROE) under the economic expansion before the firm issues any debt. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate return on equity (ROE) under the economic recession before the firm issues any debt. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate return on equity (ROE) under normal economic conditions assuming that the firm goes through with the recapitalization. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate return on equity (ROE) under the economic expansion assuming that the firm goes through with the recapitalization. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Calculate return on equity (ROE) under the economic recession assuming that the firm goes through with the recapitalization. Assume no taxes. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Repeat part (p) assuming a corporate tax rate of 35%. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Repeat part (q) assuming a corporate tax rate of 35%. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-Repeat part (r) assuming a corporate tax rate of 35%. (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)

-What is the break-even EBIT under normal economic conditions between the levered and unlevered capital structures? (Round answer to 0 decimal places)

Reference no: EM133057356

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