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. The tax rate is $35\%.$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?