Company goes through with recapitalization

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Reference no: EM132058000

RAK, Inc. has no debt outstnading and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be 36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18% higher. If there is a recession, then EBIT will be 25% lower. RAK is considering a $125,000 debt issue with an interest rate of 8%. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes for this problem.

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

Recession $______

Normal $______

Expansion $______

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

Recession _____%

Expansion ______%

Reference no: EM132058000

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