Problem $16-1$ EBIT and Leverage

Fujita, Incorporated, has no debt outstanding and a total market value of $$240,000.$

Earnings before interest and taxes, EBIT, are projected to be $$19,000$ 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 $25$ percent lower. The company

is considering a debt issue of $$120,000$ with an interest rate of $6$ percent. The proceeds

will be used to repurchase shares of stock. There are currently $6,000$ shares

outstanding. Ignore taxes for this problem. Assume the stock price is constant under all

scenarios.

a$-1.$ Calculate earnings per share $($EPS$)$ under each of the three economic scenarios

before any debt is issued. $($Do not round intermediate calculations and round your

answers to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

a$-2.$ Calculate the percentage changes in EPS when the economy expands or enters a

recession. $($A negative answer should be indicated by a minus sign. Do not round

intermediate calculations and enter your answers as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.)$

b$-1.$ Calculate earnings per share $($EPS$)$ under each of the three economic scenarios

assuming the company goes through with recapitalization. $($Do not round

intermediate calculations and round your answers to $2$ decimal places, e$.$g$.,$

$32\mathrm{.}16.)$

b$-2.$ Given the recapitalization, calculate the percentage changes in EPS when the

economy expands or enters a recession. $($A negative answer should be indicated

by a minus sign. Do not round intermediate calculations and enter your answers

as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$