13.1. EBIT and Leverage

a. Calculate EPS and the changes in the EPS under the 3 scenarios. Hint: The EPS is the net income divided by the 6,250 shares outstanding.

1. Recession

a. EPS =

b. Change =

2. Normal

a. EPS =

b. Change = no change

3. Expansion

a. EPS =

b. Change =

b. Recalculate if the company undergoes the proposed recapitalization. Hint: find the number of shares the company will repurchase and the interest payment each year (it will be the same interest each year). Subtract the Net interest from the EBIT. Calculate the changes:

1. Recession

a. EPS =

b. Change =

2. Normal

a. EPS =

b. Change = no change

3. Expansion

a. EPS =

b. Change =

1. EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes, EBIT, are projected to be $10,400 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 $42,000 debt issue with a 6 percent interest rate. The procee There are currently 6,250 shares outstanding. Ignore taxes for this problem a. Calculate earnings per share, EPS, under each of the ds will be used to repurchase shares of stock 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 Kaelea goes through with recapitalization. What do you observe