When the economy expands or enters recession

Assignment Help Financial Management

Reference no: EM132041879

Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem.

a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and 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. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.)

% EPS

Recession %

Expansion %

Assume the company goes through with recapitalization.

c. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

EPS

Recession $

Normal $

Expansion $

d. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

% EPS

Recession %

Expansion %

Reference no: EM132041879

Questions Cloud

Does the roe go up or the basic earning power : What happens to a firm when it raises its debt from 0% to 10%. Does the ROE go up or the basic earning power?

Calculate the after-tax cost of debt : After-Tax Cost of Debt. Calculate the after-tax cost of debt under each of the following conditions:

How much will you be willing to pay for the portfolio : If you require a risk premium of 11%, how much will you be willing to pay for the portfolio?

What is new price per share of the existing shares of stock : What is the new price per share of the existing shares of stock? What is the current price per share of the stock?

When the economy expands or enters recession : Calculate the percentage changes in EPS when the economy expands or enters a recession.

Required return based on the risk of the project : which project would be accepted if you use the required return based on the risk of the project ? explain why

Does operating leverage affect financial leverage : Does operating leverage affect financial leverage? Does the ROE go up or the basic earning power?

The net daily benefit of opening the new account : What would be the net daily benefit of opening the new account?

Assume that the margin requirement on common stock : Assume that the margin requirement on common stock is 50%. Contrast this to what she'd make if she uses no margin.

User Account

All Pages