Problem $16-1$ EBIT and Leverage $[$LO$1]$

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

Eamings before interest and taxes, EBIT, are projected to be $$28,000$ if economic

conditions are normal. If there is strong expansion in the economy, then EBIT will be $10$

percent higher. If there is a recession, then EBIT will be $25$ percent lower. The company

is considering a $$48,000$ debt issue with an interest rate of $4$ percent. The proceeds will

be used to repurchase shares of stock. There are currently $20\mathrm{.}000$ shares outstanding.

Ignore taxes for this problem.

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

before any debt is issued. $($Do not round Intermedlate calculatlons 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 negatlve answer should be Indlcated by a minus sign. Do not round

Intermedlate 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

Intermedlate 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 negatlve answer should be Indlcated

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

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