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Kaelea, Inc., has no debt outstanding and a total market value of $106,000. Earnings before interest and taxes, EBIT, are projected to be $9,700 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $30,600 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,300 shares outstanding. Assume Kaelea has a tax rate of 30 percent. Requirement 1: (a) Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) EPS Recession $ Normal $ Expansion $ (b) Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) %ΔEPS Recession % Expansion % Requirement 2: Assume Kaelea goes through with recapitalization. (a) Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) EPS Recession $ Normal $ Expansion $ (b) Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) %ΔEPS Recession % Expansion %
The following is from Alsatia Corporation's financial statement information for last month: The company has no beginning or ending inventories and produced and sold 10,000 units during the month. What is the company's break-even in units? How many un..
Firms with higher growth opportunities (and some research suggest that firms in high growth areas - clusters) tend to maintain greater financial slack. Explain? Basically the financial slack or flexibility will have an impact on/or it's defined by: 1..
Steele Corp has the following annual returns for the previous four years: -15%, 10%, 25%, 45%. Calculate Steele Corp’s average return, variance and standard deviation. Steele Corp has the following annual returns for the previous four years: -15%, 10..
One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized a total return of 25 percent. Your capital gain was $6 a share. What was your dividend yield on this stock?
A sinking fund can be set up in one of two ways. What are the advantages and disadvantage of each procedure from the view point of both the firm and it's bondholders?
Suppose that 1- and 2-year silver forward prices are $22 and $23 per oz., respectively. The 1- and 2-year interest rates are 6% and 6.5%. What is the swap price for this strip of forward?
You purchase a new house for $200,000 with a 5% down payment. You obtain a 30-year loan at 5% compounded monthly and will make monthly payments on the loan. Closing costs are $1,500. PMI is $150 per month for the first 5 years. Taxes are estimated to..
Garner-Wagner is considering investing in a project that requires an investment of $3,000,000. The project will generate a cash inflow of 500,000 per year for the next 5 years. The cost of capital is 10%. What is the project's net present value? What..
Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $27,000, and the company expects to sell 1,550 per year. The company currently sells 2,050 units of its existing model per year..
Och, Inc., is considering a project that will result in initial after tax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of..
What is the duration of a two-year bond that pays an annual coupon of 10 percent and whose current yield to maturity is 14 percent? Use $1,000 as the face value. What is the expected change in the price of the bond if interest rates are expected to d..
When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
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