Debt is issued and the economy is in recession

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Reference no: EM131059936

Northern Wood Products is an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $26,000 if the economy is normal, $3,000 if the economy is in a recession, and $33,000 if the economy booms. Ignore taxes. Management is considering issuing $88,000 of debt with a 6 percent coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock. Show that the earnings per share will be -$0.19, if the debt is issued and the economy is in a recession.

Reference no: EM131059936

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