Money, Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. Money is considering a $99,000 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. Money has a tax rate of 35 percent.
1) Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.
EPS
Recession $
Normal $
Expansion $
2) Calculate the percentage changes in EPS when the economy expands or enters a recession.
Percentage changes in EPS
Recession %
Expansion %
3) Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios.
EPS
Recession $
Normal $
Expansion $
4)Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.(Negative amounts should be indicated by a minus sign.
Percentage changes in EPS
Recession %
Expansion %