Question

The CFO of Metal Recycling Inc. has come up with the following projected figures for next year:

Sales                                            275,000

Costs                                            70% of sales

Depreciation                                30,000

Tax rate                                      21%

Current Shares outstanding            11,000

Metal Recycling Inc has no debt currently, but the board is considering a loan of $300,000 at 11% interest, which they will use to repurchase shares of their own stock at $100 per share. The CFO thinks his projections of sales may be off by + or - 10%.   Depreciation will stay the same. What will their EPS be under the current structure and under the proposed structure for each scenario?   Is the restructuring a good idea?

Current Structure:

Worst Case ____________ Base Case_______________ Best Case _____________

Proposed Structure:

Worst Case ____________ Base Case_______________ Best Case _____________

Should they do the restructuring? __________________

                                                            Yes or no

Answer 1

No They should not restucture as the Earnings per Share is decreasing after the restructure.

Current Structure
	Base case	Worst Case	Best Case
Sales	275,000.00	247,500.00	302,500.00
Less:Costs	192,500.00	173,250.00	211,750.00
Less:Depreciation	30,000.00	30,000.00	30,000.00
EBIT	52,500.00	44,250.00	60,750.00
Less: Interest Expense	0	0	0
EBT	52,500.00	44,250.00	60,750.00
Less: Taxes @21%	11,025.00	9,292.50	12,757.50
Net Income	41,475.00	34,957.50	47,992.50
No of shares Outstanding	11,000	11,000	11,000
Earnings Per Share	3.77	3.18	4.36

Proposed Structure
	Base case	Worst Case	Best Case
Sales	275,000.00	247,500.00	302,500.00
Less:Costs	192,500.00	173,250.00	211,750.00
Less:Depreciation	30,000.00	30,000.00	30,000.00
EBIT	52,500.00	44,250.00	60,750.00
Less: Interest Expense	33,000.00	33,000.00	33,000.00
EBT	19,500.00	11,250.00	27,750.00
Less: Taxes @21%	4,095.00	2,362.50	5,827.50
Net Income	15,405.00	8,887.50	21,922.50
No of shares Outstanding	8,000	8,000	8,000	(11,000 - (300,000/100))
Earnings Per Share	1.93	1.11	2.74

Formulas: