Question

Ghost, Inc., has no debt outstanding and a total marketvalue of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are mormal. If there is strong expansion in the economy, then the EBIT will be 30% higher. If there is a recession, then EBIT will 40% lower. The company is considering a $65,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstamding. Ignore taxes for this problem. Suppose the company has a market to book ratio of 1.0 and stock price remains constant.

c. calculate the non-operating terminal year cash flow.

d. calculate the project's payback period

e. calculate the project's IRR

g. Calculate the projects MIRR

Please use excel and show formulas. Thank you kindly.

Answer 1

a.

A table outlining the income statement with taxes for the three possible states of the economy is shown below. The share price is still $25, and there are still 7,400 shares outstanding. The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy.

	Recession	Normal	Expansion
EBIT	$17,400	$29,000	$37,700
Interest	0	0	0
Taxes	3,654	6,090	7,917
NI	$13,746	$22,910	$29,783
EPS	$1.86	$3.10	$4.02
%DEPS	–40	–––	+30

b.

A table outlining the income statement with taxes for the three possible states of the economy and assuming the company undertakes the proposed capitalization is shown below. The interest payment and shares repurchased are the same as in part b of Problem 1.

	Recession	Normal	Expansion
EBIT	$17,400	$29,000	$37,700
Interest	4,550	4,550	4,550
Taxes	2,699	5,135	6,962
NI	$10,152	$19,316	$26,189
EPS	$2.11	$4.02	$5.46
%DEPS	–47.44	–––	+35.58

Notice that the percentage change in EPS is the same both with and without taxes.