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Kaelea, Inc., has no debt outstanding and a total...

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Kaelea, Inc., has no debt outstanding and a total market value of $90,000. Earnings before interest and taxes, EBIT, are projected to be $8,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $34,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,600 shares outstanding. Assume Kaelea has a tax rate of 35 percent. Requirement 1 1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued: Recession, Normal and Expansion. R= N= E= 2. Calculate the percentage changes in EPS when the economy expands or enters a recession. E= R= Requirement 2: Assume Kaelea goes through with recapitalization. 1. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization: Recession, Normal and Expansion. R= N= E= 2. Calculate the percentage changes in EPS when the economy expands or enters a recession. E= R=

 

Paper#7187 | Written in 18-Jul-2015

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