Ghost, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest...

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Ghost, Inc., has no debt outstanding and a total market value of$250,000. Earnings before interest and taxes, EBIT, are projectedto be $40,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 20 percent higher. Ifthere is a recession, then EBIT will be 20 percent lower. Thecompany is considering a $105,000 debt issue with an interest rateof 4 percent. The proceeds will be used to repurchase shares ofstock. There are currently 10,000 shares outstanding. Ignore taxesfor this problem.

a-1.
Calculate earnings per share (EPS) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and round your answers to 2 decimalplaces, e.g., 32.16.)
Find recession EPS, normal EPS, expansionEPS
a-2.
Calculate the percentage changes in EPS when the economy expandsor enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)
Find Recession percentage change inEPS
Expansion percentage change in EPS
b-1.
Calculate earnings per share (EPS) under each of the threeeconomic scenarios assuming the company goes through withrecapitalization. (Do not round intermediate calculationsand round your answers to 2 decimal places, e.g.,32.16.)
Find recession EPS, normal EPS, expansionEPS
b-2.
Given the recapitalization, calculate the percentage changes inEPS when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)
Find Expansion EPS
Recession percentage change in EPS
Expansion percentage change inEPS

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3.6 Ratings (269 Votes)

a1 EBIT in normal economic conditions 40000 Debt 0 Interest expense 0 If we ignore taxes then tax rate 0 Net income in normal economic conditions EBIT interest1tax rate 40000 010 40000 EPS in normal economic conditions Net income No of shares outstanding 40000 10000 400 EBIT in strong expansion EBIT in normal economic conditions x 1 20 40000 x 120 48000 Net income in strong expansion conditions EBIT interest1tax rate 48000 010 48000 EPS in strong expansion conditions Net income No of shares outstanding 48000 See Answer

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Ghost, Inc., has no debt outstanding and a total market value of$250,000. Earnings before interest and taxes, EBIT, are projectedto be $40,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 20 percent higher. Ifthere is a recession, then EBIT will be 20 percent lower. Thecompany is considering a $105,000 debt issue with an interest rateof 4 percent. The proceeds will be used to repurchase shares ofstock. There are currently 10,000 shares outstanding. Ignore taxesfor this problem. a-1.Calculate earnings per share (EPS) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and round your answers to 2 decimalplaces, e.g., 32.16.)Find recession EPS, normal EPS, expansionEPSa-2.Calculate the percentage changes in EPS when the economy expandsor enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)Find Recession percentage change inEPSExpansion percentage change in EPSb-1.Calculate earnings per share (EPS) under each of the threeeconomic scenarios assuming the company goes through withrecapitalization. (Do not round intermediate calculationsand round your answers to 2 decimal places, e.g.,32.16.)Find recession EPS, normal EPS, expansionEPSb-2.Given the recapitalization, calculate the percentage changes inEPS when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)Find Expansion EPSRecession percentage change in EPSExpansion percentage change inEPS

a-1.	Calculate earnings per share (EPS) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and round your answers to 2 decimalplaces, e.g., 32.16.) Find recession EPS, normal EPS, expansionEPS
a-2.	Calculate the percentage changes in EPS when the economy expandsor enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.) Find Recession percentage change inEPS Expansion percentage change in EPS
b-1.	Calculate earnings per share (EPS) under each of the threeeconomic scenarios assuming the company goes through withrecapitalization. (Do not round intermediate calculationsand round your answers to 2 decimal places, e.g.,32.16.) Find recession EPS, normal EPS, expansionEPS
b-2.	Given the recapitalization, calculate the percentage changes inEPS when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.) Find Expansion EPS Recession percentage change in EPS Expansion percentage change inEPS