Economic scenarios before debt is issued-recapitalization

Assignment Help Financial Management
Reference no: EM13943789

Kaelea, Inc., has no debt outstanding and a total market value of $117,000. Earnings before interest and taxes, EBIT, are projected to be $8,300 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. Kaelea is considering a $41,700 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 3,900 shares outstanding. Ignore taxes for this problem.

Requirement 1:

(a) Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

(b) Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

Requirement 2: Assume Kaelea goes through with recapitalization.

(a) Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

(b) Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

Reference no: EM13943789

Questions Cloud

Implements a method that receives an array parameter : Continue to properly document your source code. Write this program as if you were explaining it to someone new to arrays. Fully document your code in such a way newcomers to Java will understand and be able to implement a Java array.
Advantages and disadvantages of twisted pair cabling : Create an 8- to 10-slide presentation explaining the advantages and disadvantages of twisted pair cabling and fiber optics as well as the importance of wireless communication in today's business environment
Importance of internal branding and establishing equity : What other banks are performing in the same space and how are they approaching the task of building brand equity - What commercial implications may arise if the brand (or any brand) becomes dated - importance of internal branding and establishing equ..
What is the most favorite loop structure, and why : Give an example of how you might use a C array to solve a real life business problem.
Economic scenarios before debt is issued-recapitalization : Kaelea, Inc., has no debt outstanding and a total market value of $117,000. Earnings before interest and taxes, EBIT, are projected to be $8,300 if economic conditions are normal. Calculate earnings per share, EPS, under each of the three economic sc..
Calculate the amount of cash spent for equipment : Calculate the amount of cash spent for equipment during 2009. Calculate the amount that should be included as a cash inflow from the sale of equipment.
What is the interest tax shield : Fleury Co. has a 32 percent tax rate. Its total interest payment for the year just ended was $36.8 million. What is the interest tax shield?
How does the algorithm you chose affect the result : How do the algorithm techniques of fragmentation affect the end result of sorting through larger amounts?
Difference between a francis turbine and a pelton wheel : Calculate the power supplied by the module when it operates at each of the points, X, Y and Z of Figure 1. Comment briefly on the significance of the relative values of your three answers.

Reviews

Write a Review

 

Financial Management Questions & Answers

  Clarify the NAL and maximum lease payment

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.7 million in annu..

  Effective annual interest rate on this lending arrangement

Come and Go Bank offers your firm a discount interest loan with an interest rate of 8 percent for up to $24 million, and in addition requires you to maintain a 1 percent compensating balance against the face amount borrowed. What is the effective ann..

  Role of financial management in a firm

The Role of Financial Management in a Firm. Describe why a manager needs to understand the characteristics and importance of financial markets including risk and efficiency

  Explain how the euro may affect uk international trade

Explain how the euro may affect UK international trade. When South Korea's export growth stalled, some South Korean firms suggested that South Korea's primary export problem was the weakness in the Japanese yen.

  How many days would the cash conversion cycle be changed

Cyree Inc. has annual sales of $80,000,000; its average inventory is $20,000,000; and its average accounts receivable is $16,000,000. The firm buys all raw materials on terms of next 35 days, and it pays on time. The firm is searching for ways to sho..

  Evaluating a project for the tiff-any golf club

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $460 per unit and sales volume to be 1,000 units in year 1; 900 units in year 2; and 1,325 units in ye..

  What is average accounting return criterion decision rule

Describe how the average accounting return is usually calculated and describe the information this measure provides about a sequence of cash flows. What is the Average Accounting Return criterion decision rule? What problems associated with using the..

  New clubs will also require increase in net working capital

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $760 per set and have a variable cost of $382 per set. The company has spent $191425 for a marketing study that determined the company will sell 55749 sets per year fo..

  What is the stock price for each company

Red, Inc., Yellow, Corp., and Blue Company each will pay a dividend of $2.65 next year. The growth rate in dividends for all three companies is 5%. The required return for each company's stock is 8%, 11% and 14% respectively.  What is the stock price..

  Stock index performance

Stock Index Performance On November 27, 2007, The Dow Jones Industrial Average closed at 13,048.44, which was up 260.04 that day. What was the return (in percent) of the stock market that day?

  Motives for holding cash-issues short-term debt

GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, the credit markets froze and no funds were available for borrowing. Fortunately, the firm had some cash reserves saved that it was able to use to fund its operation..

  Prepaid finance charges

"A borrower takes a $300,000 loan with fixed rate of 4% amortized with monthly payments over 30 years. There are prepaid finance charges of 1 point on the loan amount plus $1,500. Calculate the APR. [Format Answer as a percentage - X.XX]"

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd