Problem $16-2$ EBIT, Taxes, and Leverage $[$LO$2]$

Fujita, Incorporated, has no debt outstanding and a total market value of $$382,500.$

Earnings before interest and taxes, EBIT, are projected to be $$52,000$ if economic

conditions are normal. If there is strong expansion in the economy, then EBIT will be $14$

percent higher. If there is a recession, then EBIT will be $23$ percent lower. The

company is considering a $$190,000$ debt issue with an interest rate of $7$ percent. The

proceeds will be used to repurchase shares of stock. There are currently $8,500$ shares

outstanding. The company has a tax rate of $25$ percent, a market$-$to$-$book ratio of $1\mathrm{.}0,$ and

the stock price remains constant.

$0-1.$ Calculate earnings per share $($EPS$)$ under each of the three economic scenarios

before any debt is issued. $($Do not round Intermedlete colculatlons and round

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

$0-2.$ Calculate the percentage changes in EPS when the economy expands or enters a

recession. $($A negatlve onswer should be Indlcated by a minus sign. Do not round

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

declmal ploces, 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 onswer should be Indlcoted

by a minus slgn$.$ Do not round Intermedlete colculations and enter your onswers

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

Answer is complete but not entirely correct.