Question

Hello!

I am stuck on only B-1 Recession EPS - I got everything else and I cannot figure out what I'm doing wrong - I keep getting $4.81, but it's incorrect and I don't know why. Can you help? I pasted my numbers below the 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.
a-2.	Calculate the percentage changes in EPS when the economy expands or enters a recession.
b-1.	Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.
b-2.	Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

I know the answers outside of the recession one are correct - so I cannot determine what is wrong, can you help? Below is my work.

B-1
Market Value per Share	32.88
Number of Shares Repurchased	3954.17
Number of Shares Outstanding after repurchase	3345.83
Interest Expense on Debt	9100
Particulars	Recession	Normal	Expansion
EBIT	30,000	40,000	45600
EBT	20,900	30,900	36500
Earnings After Tax	16093	23793	28105
Shares Outstanding After Repurchase	3345.83	3345.83	3345.83
EPS	$4.81	$7.11	$8.40

Thank you!

Answer 1