In: Finance
Castle, Inc., has no debt outstanding and a total market value
of $220,000. Earnings before interest and taxes, EBIT, are
projected to be $26,000 if economic conditions are normal. If there
is strong expansion in the economy, then EBIT will be 15 percent
higher. If there is a recession, then EBIT will be 20 percent
lower. The firm is considering a debt issue of $120,000 with an
interest rate of 8 percent. The proceeds will be used to repurchase
shares of stock. There are currently 11,000 shares outstanding. The
firm has a tax rate 35 percent. Assume 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.)
ANSWERS ARE NOT Recession 1.89, Normal 2.36, Expansion 2.72
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.)
ANSWERS ARE NOT Recession 2.24, Normal 3.28, Expansion 4.06