Calculate percentage change in EPS when the economy expands

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Reference no: EM13927578

RAK, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $30,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $75,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,000 shares outstanding. RAK has a tax rate of 35 percent.

a1) Calculate EPS under each scenario:

Recession = $

Normal = $

Expansion = $

a2) Calculate percentage change in EPS when the economy expands or enters a recession.

Recession % =

Expansion % =

b1) Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.

Recession = $

Normal = $

Expansion = $

b2) Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

Recession % =

Expansion % =

Reference no: EM13927578

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