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RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest...

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Finance

RAK, Inc., has no debt outstanding and a total market value of$220,000. 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 10 percent higher. Ifthere is a recession, then EBIT will be 20 percent lower. RAK isconsidering a $135,000 debt issue with an interest rate of 4percent. The proceeds will be used to repurchase shares of stock.There are currently 11,000 shares outstanding. RAK has a tax rateof 35 percent.

Calculate earnings per share (EPS) under each of the threeeconomic scenarios assuming the company goes through withrecapitalization.

Given the recapitalization, calculate the percentage changes inEPS when the economy expands or enters a recession

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