Concept explainers
a)
To calculate: The EPS (Earnings per share) under three scenarios before the debt issue and the changes in EPS while the economy expands a recession.
Introduction:
The EPS is the part of the profit of a firm that is allocated to every outstanding share of the common stock. It indicates the profitability of the company.
Answer:
The EPS under the recession, normal, and expansion periods are $2.48, $3.82, and $4.77 respectively and the percentage of change in EPS is -35% and +25 for the recession and expansion periods respectively.
b)
To calculate: The EPS (Earnings per share) under three scenarios before the debt issue and the changes in EPS while the economy expands a recession by assuming that the firm undergoes the planned recapitalization.
Introduction:
The EPS is the part of the profit of a firm that is allocated to every outstanding share of the common stock. It indicates the profitability of the company.
Answer:
After recapitalization, the EPS under the recession, normal, and expansion periods are $2.70, $4.80, and $6.30 respectively and the percentage of change in EPS is -43.75% and +31.25 for the recession and expansion periods respectively.
Want to see the full answer?
Check out a sample textbook solutionChapter 16 Solutions
Fundamentals of Corporate Finance
- Questions 2 Maynard Inc. has no debt outstanding and a total market value of $ 250,000. Earnings before interest ana taxes, EBIT, are projected to be $ 28,000 if economi conditions are normal. If there is strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $ 90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Suppose the company has a market-to-book ratio 1.0 a. Calculate return of equity (ROE) under each of the three economic scenarios before any debt issued. Also calculate the percentage changes in ROE for economic expansion dan recession, assuming no taxes b. Repeat Part (a) assuming the firm goes through with the proposed recapitalizatio C. Repeat Part (a) and (b) of this problem assuming the firm has a tax rate of 35 percentarrow_forward30. Trade-Off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity- financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The discount rate for the firm's projects is 10%. (LO16-3) a. What is the market value of the firm? b. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)? c. Recompute your answer to part (b) under the following assumptions: The debt issue raises the probability of bankruptcy. The firm has a 30% chance of going bankrupt after 3 years. If it does go bankrupt, it will incur bankruptcy costs of $200,000. The discount rate is 10%. d. Should the firm issue the debt under these new assumptions?arrow_forward1.10 Norwell Inc. has equity with a market value of $900 million and a current debt to capital ratio of 10%. If Norwell has an optimal debt ratio of 40% and would like to borrow money and buy back stock right now, how much additional debt will the firm have to issue? a. $260 million b. $300 million c. $400 million d. $600 million e. None of the abovearrow_forward
- Your company doesn't face any taxes and has $755 million in assets, currently financed entirely with equity. Equity is worth $50.50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Recession Average Boom Probability of State .20 .60 .20 Expect EBIT in State $105 million $180 million $240 million The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)arrow_forwardMoney, 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% higher. If there is a recession, then EBIT will be 20% lower. Money 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. Ignore taxes for this problem. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.arrow_forwardMr Price, has no debt outstanding and a total market value of R150,000. Earnings before interest and taxes [EBIT] are projected to be R14,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Mr Price is considering a R60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem. Calculate the % changes in EPS when the economy expandsarrow_forward
- Mr Price, has no debt outstanding and a total market value of R150,000. Earnings before interest and taxes [EBIT] are projected to be R14,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Mr Price is considering a R60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem. Calculate earnings per share [EPS] under the recession economic scenario before any debt is issuedarrow_forwardMr Price, has no debt outstanding and a total market value of R150,000. Earnings before interest and taxes [EBIT] are projected to be R14,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Mr Price is considering a R60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem. Calculate the % changes in EPS when the economy enters a recessionarrow_forwardMr Price, has no debt outstanding and a total market value of R150,000. Earnings before interest and taxes [EBIT] are projected to be R14,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Mr Price is considering a R60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem. Assuming that Mr Price goes through with recapitalization. Calculate the % changes in EPS when the economy expandsarrow_forward
- Mr Price, has no debt outstanding and a total market value of R150,000. Earnings before interest and taxes [EBIT] are projected to be R14,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Mr Price is considering a R60,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem. Assuming that Mr Price goes through with recapitalization. Calculate earnings per share [EPS] under each the normal economic scenario after debt is issued. NB! The proceeds will be used to repurchase shares of stockarrow_forwardMaynard Inc. has no debt outstanding and a total market value of $ 250,000. Earnings before interest ana taxes, EBIT, are projected to be $ 28,000 if economi conditions are normal. If there is strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $ 90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Suppose the company has a market-to-book ratio 1.0 a. Calculate return of equity (ROE) under each of the three economic scenarios before any debt issued. Also calculate the percentage changes in ROE for economic expansion dan recession, assuming no taxes b. Repeat Part (a) assuming the firm goes through with the proposed recapitalization c. Repeat Part (a) and (b) of this problem assuming the firm has a tax rate of 35 percent Thanks in advancearrow_forwardQuestions 1 Maynard Inc. has no debt outstanding and a total market value of $250,000. EBIT are projected to be $28,000 if the economic condition is normal. If there is a strong expansion in the economy. then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. A. Calculate EPS under each of the 3 economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enter recession. B. Repeat part (a) assuming that the economy goes through with recapitalization. What do you observe? C. Repeat parts a and b in ex. 1 assuming Maynard has a tax rate of 35%.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT