$1.$ EBIT and Leverage $($LO$2)$ Charny Inc. has no debt outstanding and a total

market value of $$165,000.$ Earnings before interest and taxes, EBIT, are projected

to be $$21,000$ if economic conditions are normal. If there is strong expansion

in the economy, then EBIT will be $20\%$ higher. If there is a recession, then EBIT

will be $25\%$ lower. Charny is considering a $$60,000$ debt issue with a $7\%$ interest rate. The proceeds will be used to repurchase shares of stock. There are currently

$5,500$ shares outstanding. Ignore taxes for this problem.

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?

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$2.$ EBIT, Taxes, and Leverage $($LO$3)$ Repeat parts $($a$)$ and $($b$)$ in Problem $1$

assuming Charny has a tax rate of $35\%.$