When the economy expands or enters recession

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Reference no: EM132057974

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 earnings per share (EPS) under each of the three economic scenarios before any debt is issued.

Recession $_____

Normal $______

Expansion $_______

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

Recession _______%

Expansion ________%

Reference no: EM132057974

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