Debt outstanding-earnings before interest and taxes

Assignment Help Financial Management
Reference no: EM13929707

RAK, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $60,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. RAK has a tax rate of 35 percent.

1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.

Recession: $

Normal: $

Expansion: $

2. Calculate the percentage changes in EPS when the economy expands or enters a recession.

Recession: %

Expansion: %

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

Recession: $

Normal: $

Expansion: $

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

Recession: %

Expansion: %

Reference no: EM13929707

Questions Cloud

Experiencing rapid growth-what is the projected dividend : Momsen Corp. is experiencing rapid growth. Dividends are expected to grow at 28 percent per year during the next three years, 18 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 11 percen..
When is it appropriate to speak out on ethical issues : Do leaders have a greater responsibility than modeling ethical behavior? What responsibilities do leaders have for creating ethical organizations  When is it appropriate to speak out on ethical issues?
What is the discounted payback period at discount rate : A project has an initial cash outflow of $1,110 and cash inflows of $315 per year for 4 years. What is the discounted payback period at a discount rate of 9.1 percent?
Cost of capital have to increase for the npv to be zero : The management team of a cable company estimates that the cost of installing new cable in a certain area of the city is $17 million. However, they will receive a cash flow of $1.4 million per year indefinitely. The net present value (NPV) of this inv..
Debt outstanding-earnings before interest and taxes : RAK, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percen..
What amount of net income did smart business systems : What amount of net income did Smart Business Systems report on the 2013 income statement?
Firm is owed an account receivable-money market hedge : Suppose your firm is owed an account receivable of C$1,000,000 due on Dec. 23, 2015. Treat this as a one-month hedge. Show how you would hedge this debt with: a money market hedge (use appropriate borrowing and lending rates),
What is the net realizable value of accounts receivable : What is the net realizable value of accounts receivable at December 31, 2013?

Reviews

Write a Review

 

Financial Management Questions & Answers

  Common stockholders expect greater returns

Common stockholders expect greater returns than bondholders because: An decrease in the ________ will increase the value of preferred stock. Changes in the general economy, such as changes in interest rates or tax laws, represent what type of risk?

  Invest in a new computer system

Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B. System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each..

  Balance sheet information-how much long-term debt

Tim Dye, the CFO of Blackwell Automotive, Inc., is putting together this year's financial statements. He has gathered the following balance sheet information: The firm had a cash balance of $23,015, accounts payable of $163,257, common stock of $314,..

  Net after tax interest cost associated with this bond issue

Charter Corp has issued 2,500 debentures with a total principal value of $2500000. The bonds have a coupon interest rate of 7%. a. What dollar amount of interest per bond can an investor expect to receive each year from charter? b. What is Charter's ..

  Receive a credit card application

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.8 percent per year, compounded monthly for the first six months, increasing thereafter to 17 percent compounded monthly.

  What is its present value

Perpetuity of $4,500 per year beginning today is said to offer a 13% interest rate. What is its present value?

  Share of preferred stock pays a constant dividend

Assume a share of preferred stock pays a constant dividend of $1.15. If the required return is 5%, what is the expected price of this preferred stock?

  Year-end the yield curve will be flat

One-year bonds yield 7%, two-year bonds yield 8%, three-year bonds and greater maturity bonds all yield 9%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 8%, once a year. Which bond should you buy if ..

  What was the average real risk premium

You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –25.8 percent, 14.2 percent, 31.4 percent, 2.6 percent, and 21.6 percent. The average inflation rate over this period was 3.26 percent and the average T-b..

  Conditional sale contract requires two payments

A conditional sale contract requires two payments three and six months after the date of the contract. Each payment consists of $1,890 principal plus interest at 12.5% on $1,890 from the date of the contract. One month into the contract, what price w..

  Suppose the firm value-return on equity

Suppose the firm value is $100 million, and the market value of its equity is $40 million. Given the return on equity is 20%, and the return on debt is 10%. Calculate the WACC for the firm. (Ignoring Tax)

  What was boyds profit or loss from this contract

Boyd Company sold a futures contract (one) on Treasury bonds that specified a price of 93-00. When the position was closed out, the price of the Treasury bond futures contract was 94-20. Did interest rates increase or decrease? How do you know? What ..

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