Question

Sunrise, Inc., has no debt outstanding and a total market value of $240,900. Earnings before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 25 percent lower. The company is considering a $130,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,300 shares outstanding. The company has a tax rate of 23 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.)

	a-1. Recession EPS Normal EPS Expansion EPS a-2. Recession percentage change in EPS % Expansion percentage change in EPS % b-1. Recession EPS Normal EPS b-2. Expansion EPS Recession percentage change in EPS % Expansion percentage change in EPS %

Answer 1