Kaelea, Inc., has no debt outstanding and a total market value of $100,000. Earnings before interest and...

90.2K

Verified Solution

Question

Finance

Kaelea, Inc., has nodebt outstanding and a total market value of $100,000. Earningsbefore interest and taxes, EBIT, are projected to be $8,400 ifeconomic conditions are normal. If there is strong expansion in theeconomy, then EBIT will be 24 percent higher. If there is arecession, then EBIT will be 31 percent lower. The company isconsidering a $35,000 debt issue with an interest rate of 6percent. The proceeds will be used to repurchase shares of stock.There are currently 4,000 shares outstanding. Ignore taxes for thisproblem.

a. Calculate earnings per share, EPS, under eachof the three economic scenarios before any debt is issued.(Do not round intermediate calculations and round youranswers to 2 decimal places, e.g., 32.16.)
EPS
Recession $
Normal $
Expansion $
b.Calculate the percentage changes in EPS when the economy expands orenters a recession. (A negative answer should be indicatedby a minus sign. Do not round intermediate calculations and enteryour 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 eachof the three economic scenarios after the recapitalization.(Do not round intermediate calculations and round youranswers to 2 decimal places, e.g., 32.16.)
EPS
Recession $
Normal $
Expansion $

d. Calculate the percentage changes in EPS whenthe economy expands or enters a recession. (A negativeanswer should be indicated by a minus sign. Do notround intermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)
%?EPS
Recession %
Expansion %
rev:04_20_2017_QC_CS-86652

Answer & Explanation Solved by verified expert

3.6 Ratings (301 Votes)

a Calculation of EPS in each of three scenarios EPS Net income number of shares outstanding Normal Recession Expansion EBIT 8400 8400 31 5796 8400 24 10416 Number of shares 4000 4000 4000 EPS 8400 4000 210 5796 4000 144 10416 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Kaelea, Inc., has nodebt outstanding and a total market value of $100,000. Earningsbefore interest and taxes, EBIT, are projected to be $8,400 ifeconomic conditions are normal. If there is strong expansion in theeconomy, then EBIT will be 24 percent higher. If there is arecession, then EBIT will be 31 percent lower. The company isconsidering a $35,000 debt issue with an interest rate of 6percent. The proceeds will be used to repurchase shares of stock.There are currently 4,000 shares outstanding. Ignore taxes for thisproblem.a. Calculate earnings per share, EPS, under eachof the three economic scenarios before any debt is issued.(Do not round intermediate calculations and round youranswers to 2 decimal places, e.g., 32.16.)EPSRecession$Normal$Expansion$b.Calculate the percentage changes in EPS when the economy expands orenters a recession. (A negative answer should be indicatedby a minus sign. Do not round intermediate calculations and enteryour answers as a percent rounded to the nearest whole number,e.g., 32.)%?EPSRecession%Expansion%Assume the company goes through with recapitalization.c. Calculate earnings per share, EPS, under eachof the three economic scenarios after the recapitalization.(Do not round intermediate calculations and round youranswers to 2 decimal places, e.g., 32.16.)EPSRecession$Normal$Expansion$d. Calculate the percentage changes in EPS whenthe economy expands or enters a recession. (A negativeanswer should be indicated by a minus sign. Do notround intermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)%?EPSRecession%Expansion%rev:04_20_2017_QC_CS-86652