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Item2

Item 2

Ghost, Inc., has no debt outstanding and a total market value of $220,100. Earnings before interest and taxes, EBIT, are projected to be $38,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 23 percent lower. The company is considering a $120,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,100 shares outstanding. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.

a-1.	Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.
a-2.	Calculate the percentage changes in EPS when the economy expands or enters a recession.
b-1.	Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.
b-2.	Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.