Question

Minion, Inc., has no debt outstanding and a total market value of $408,900. Earnings before interest and taxes, EBIT, are projected to be $54,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 21 percent lower. The company is considering a $200,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,700 shares outstanding. The company has a tax rate of 22 percent, a market-to-book ratio of 1.0, and the stock price remains constant. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

	Recession	Normal	Expansion
EBIT	42,660	54,000	61,020
Less: Interest	0	0	0
Earnings before taxes	42,660	54,000	61,020
Less: Taxes	9,385	11,880	13,424
Net Income	33,275	42,120	47,596
Number of Shares	8,700	8,700	8,700
EPS	3.82	4.84	5.47
% change
Recession = (3.82-4.84)/4.84	-21.00%
Expansion	13.00%

b
	Recession	Normal	Expansion
EBIT	42,660	54,000	61,020
Less: Interest	10000	10000	10000
Earnings before taxes	32,660	44,000	51,020
Less: Taxes	7,185	9,680	11,224
Net Income	25,475	34,320	39,796
Number of Shares	5,912	5,912	5,912
EPS	4.31	5.81	6.73
% change
Recession	-25.77%
Expansion	15.95%
Value per share = 408900/8700	71.736842
Shares repurchased = 200000/Value per share	2787.9677