Question

Sunrise, Inc., has no debt outstanding and a total market value of $395,600. Earnings before interest and taxes, EBIT, are projected to be $53,000 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 22 percent lower. The company is considering a $195,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,600 shares outstanding. The company has a tax rate of 21 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

4	a.1		Recession	Normal	Expansion
5		EBIT	41340	53000	59890
6	Less	interest	0	0	0
7		EBT	41340	53000	59890
8	Less	Tax	0	0	0
9		Net income	41340	53000	59890
10		Number of shares	8600	8600	8600
11		EPS	4.806977	6.162791	6.963953
12		EPS (rounded)	4.81	6.16	6.96
13	a.2	% change in EPS
14		Recession	-22.00%
15		Expansion	13.00%
		New share = Outstanding share - repurchase share
		share price per share = Total market value / number of share
		= 395600/8600 =46
		number of repurchase share = Debt/ Share price per share = 195000/46
		= 4239
		new share = 8600-4239 =4361
21	b.1		Recession	Normal	Expansion
22		EBIT	41340	53000	59890
23	Less	interest (Debt*interest rate)	15600	15600	15600
24		EBT	25740	37400	44290
25	Less	Tax (EBT*Tax rate)	5405.40	7854.00	9300.90
26		Net income	20334.60	29546.00	34989.10
27		Number of shares	4361	4361	4361
28		EPS	4.662830	6.775052	8.023183
29		EPS (rounded)	4.66	6.78	8.02
30	b.2	% change in EPS
31		Recession	-31.18%
32		Expansion	18.42%

formula:

4	a.1		Recession	Normal	Expansion
5		EBIT	=53000*(100%-22%)	53000	=53000*(100%+13%)
6	Less	interest	0	0	0
7		EBT	=F5-F6	=G5-G6	=H5-H6
8	Less	Tax	0	0	0
9		Net income	=+F7-F8	=+G7-G8	=+H7-H8
10		Number of shares	8600	8600	8600
11		EPS	=F9/F10	=G9/G10	=H9/H10
12		EPS (rounded)	4.81	6.16	6.96
13	a.2	% change in EPS
14		Recession	=(F12-G12)/G12
15		Expansion	=(H12-G12)/G12

21	b.1		Recession	Normal	Expansion
22		EBIT	=53000*(100%-22%)	53000	=53000*(100%+13%)
23	Less	interest (Debt*interest rate)	=195000*8/100	=195000*8/100	=195000*8/100
24		EBT	=F27-F28	=G27-G28	=H27-H28
25	Less	Tax (EBT*Tax rate)	=F29*0.21	jeff jeffy Next > < Previous Related Solutions Sunrise, Inc., has no debt outstanding and a total market value of $296,400. Earnings before interest... Sunrise, Inc., has no debt outstanding and a total market value of $296,400. Earnings before interest and taxes, EBIT, are projected to be $45,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 19 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $155,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of... Sunrise, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest... Sunrise, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $13,000 if economic conditions are normal. 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