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Control Inc., has no debt outstanding and a total market value of $100,000. EBIT is projected...

Control Inc., has no debt outstanding and a total market value of $100,000. EBIT is projected to be $6,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. The firm is considering a $40,000 debt issue with 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem.

  1. Calculate EPS under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession. ($0.96; $2.4; $3.12, -60%; 30%)
  2. Repeat part (a) assuming that the firm goes through with capitalization. ($0.27; $2.67; $3.87; -90%, 45%)

Please no Excel, and Show formula. I will rate! Thank u

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Expert Solution

Sorry, I had to use excel. I don't have other options. But I tried to give all the formulae. Any doubts kindly comment. I will answer them too.

jeff jeffy answered 8 months ago
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