Beckett, Inc., has no debt outstanding and a total market value of $200,000. 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 12 percent higher
| Beckett, Inc., has no debt outstanding and a total market value of $200,000. 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 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Beckett is considering a debt issue of $65,000 with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. The company has a tax rate 35 percent. |
| 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 final answers to 2 decimal places (e.g., 32.16).) |
| EPS | |
| Recession | $ |
| Normal | $ |
| Expansion | $ |
| a-2. | Calculate the percentage changes in EPS when the economy expands or enters a recession.(Do not round intermediate calculations.Negative amounts should be indicated by a minus sign. Enter your answers as a percent.) |
| Percentage changes in EPS | |
| Recession | % |
| Expansion | % |
| 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 final answers to 2 decimal places (e.g., 32.16).) |
| EPS | |
| Recession | $ |
| Normal | $ |
| Expansion | $ |
| b-2. | Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Percentage changes in EPS | |
| Recession | % |
| Expansion | % |
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