Business, 06.04.2020 19:26 djtblaster
Music City, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $105,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. The company has a tax rate 35 percent. Assume the stock price is constant.
Required:
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.
b. Calculate the percentage changes in EPS when the economy expands or enters a recession.
c. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.
d. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.
Answers: 1
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Music City, Inc., has no debt outstanding and a total market value of $250,000. Earnings before inte...
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