Question: Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 35 percent. Problem 1 a. Calculate earnings per share,

Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 35 percent.

Problem 1

a. Calculate earnings per share, 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.

b. Repeat part (a) assuming that the company goes through with recapitalization. What do you observe? Assume the stock price remains constant.

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With the Debt Issue under taxes the Taxable Income reduces thereby reducing the taxes as compared to No Debt Thus Cash flows under Debt issue increase With the introduction of the taxes the Earnings p... View full answer

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