Great Harvest Logistics Ltd is a fully-equity-funded company with a market value of $650 million and...

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Great Harvest Logistics Ltd is a fully-equity-funded companywith a market value of $650 million and five million sharesoutstanding. The company’s CFO Lewis Taylor is forecasting threedifferent scenarios for the economic condition. Under the normalscenarios (base case), the company’s Earnings Before Interest andTaxes (EBIT) is projected to be $13.9 million. If the economy isbetter than expected (bull case), its EBIT is expected to be 20%higher than the base case, while its EBI T is projected to be 30%lower than the base case if the economy is worse than expected(bear case). Ignore any tax factor.
a What is the earnings per share (EPS) under each of the threescenarios?
b To take advantage of the low interest rate environment, Lewisis considering a plan to issue $65 million debt at a 3% interest rate to finance a share repurchase programme. Under this plan, whatis the EPS in each of the three scenarios?
c Under the share repurchase programme, how will the change inEPS under the bull and bear cases compare with the original capitalstructure? Why?

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4.3 Ratings (837 Votes)

Base Case Bull Cast Bear Case a EBIT 13900000 16680000 9730000 Total capital 650000000 650000000 650000000 Equity 650000000 650000000 650000000 Debt Interest EBT 13900000 16680000 9730000 Tax NI 13900000 See Answer

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Great Harvest Logistics Ltd is a fully-equity-funded companywith a market value of $650 million and five million sharesoutstanding. The company’s CFO Lewis Taylor is forecasting threedifferent scenarios for the economic condition. Under the normalscenarios (base case), the company’s Earnings Before Interest andTaxes (EBIT) is projected to be $13.9 million. If the economy isbetter than expected (bull case), its EBIT is expected to be 20%higher than the base case, while its EBI T is projected to be 30%lower than the base case if the economy is worse than expected(bear case). Ignore any tax factor.a What is the earnings per share (EPS) under each of the threescenarios?b To take advantage of the low interest rate environment, Lewisis considering a plan to issue $65 million debt at a 3% interest rate to finance a share repurchase programme. Under this plan, whatis the EPS in each of the three scenarios?c Under the share repurchase programme, how will the change inEPS under the bull and bear cases compare with the original capitalstructure? Why?