User Account

All Pages

Calculate percentage changes in eps when economy expands

Assignment Help Financial Management
Reference no: EM131072105

RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $120,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. RAK has a tax rate of 35 percent.

a-1: Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places)

Recession?

Normal?

Expansion?

a-2: Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places)

Recession (-19.92)

Expansion?

b-1: Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places)

Recession?

Normal?

Expansion?

b-2: Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places)

Recession (-31.71)

Expansion (23.78)

Reference no: EM131072105

Questions Cloud

The after-tax cashflows generated by the two-year : Cnooc, a Chinese public-sector company, has made a bid to purchase Unocal, a big U.S oil company, for $18.5 billion in June 2005. Treat this as an initial investment made by Cnooc in this two-year, U.S based project. If the after-tax cashflows genera..
What should the stock price be : A call option on Jupiter Motors stock with an exercise price of $95 and one-year expiration is selling at $5. A put option on Jupiter stock with an exercise price of $95 and one-year expiration is selling at $3.5. If the risk-free rate is 7% and Jupi..
According to put-call parity-what should be the value of put : A put option on a stock with a current price of $44 has an exercise price of $46. The price of the corresponding call option is $3.90. According to put-call parity, if the effective annual risk-free rate of interest is 5% and there are three months u..
How much can randall deduct due to these losses : Randall owns 800 shares in Fabrication, Inc., an S corporation in Moss Hill, Texas. In 2014, the basis in his stock is $30,000, before the adjustment for this year’s losses. During 2014, Randall’s share of the corporation’s ordinary loss is $20,000, ..
Calculate percentage changes in eps when economy expands : RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percen..
Best estimate of the company cost of equity : Stock in Daenerys Industries has a beta of 1.8. The market risk premium is 5 percent, and T-bills are currently yielding 4.8 percent. The company’s most recent dividend was $2.00 per share, and dividends are expected to grow at an annual rate of 5 pe..
Generate no internal equity for the foreseeable future : Caughlin Company needs to raise $70 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. What is the true initial cost figure the company should use whe..
What is the firm cost of equity : Martin Industries just paid an annual dividend of $1.70 a share. The market price of the stock is $37.10 and the growth rate is 5.2 percent. What is the firm's cost of equity? 10.02 percent 17.03 percent 10.54 percent 5.89 percent 9.52 percent
Extension of the firm current operations : Antonio's is analyzing a project with an initial cost of $41,000 and cash inflows of $26,000 a year for 2 years. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. What is the projected net..

Reviews

Write a Review

Financial Management Questions & Answers

  Discuss the culture of the country

Discuss the culture of the country

  Major stake of shares and is threatening to exert influence

Suppose a firm finds itself as the target of a possible hostile takeover. An outsider investor has acquired a major stake of shares and is threatening to exert influence on the board.

  Bracketed income tax system-what is your marginal tax rate

The Nation of Taxylvania uses a bracketed income tax system. The tax brackets are listed below. What is your marginal tax rate?

  What will the market price per share be after the dividend

Murphy's, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $8 per share. The balance sheet shows $32,500 in the capital in excess of par account, $10,000 in the common stock account and $42,700 in t..

  Suppose that put options on stock with strike prices

Suppose that put options on a stock with strike prices $45 and $55 cost $5 and $9, respectively. Use these options to create a bear spread. At what stock price at maturity will you break even? In other words, at what stock price, will you make $0 pro..

  Similarities between warrants and convertible bonds

Explain differences and similarities between Warrants and Convertible Bonds. Explain differences and similarities between callable bonds and convertible bonds. Explain differences and similarities between primary, secondary and over-the-counter marke..

  About the expected return

T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a 35% chance of producing a 9% return, and a 15% chance of producing a -25% return. What is Martell's expected return?

  Require rate of return

The last annual dividend on KCBT Corporation's common stock, paid yesterday, was $0.50. If you require a rate of return of 10 percent, If you expect the dividends on KCBT to grow at a constant rate of 9 percent, what is the highest price you should b..

  What was the firms end-of-year cash balance

You have just been hired as a financial analyst for Basel Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow statement for..

  What is the risk premium of a zero beta stock

FIN510 - Aspects of Corporate Finance - What is the risk premium of a zero beta stock? Does that mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio & replacin..

  Compute the risk-neutral probability

A stock price is currently $80. It is known that in 4 months it will be either $75 or $85. The risk-free interest rate is 5% per year with continuous compounding. Consider a 4-month European call option with a strike price of $80. Compute the risk-ne..

  Portfolio of diversified common stocks

How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or ..

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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