lems Seved Help Save Exit Submit Check my work Castle Inc ha

lems Seved Help Save& Exit Submit Check my work Castle, Inc., has no debt outstanding and a total market value of $150000. Earnings before interest and taxes, EBIT, are projected to be $36,000 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 25 percent lower. The firm is considering a debt issue of $95,000 with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 outstanding. Ignore taxes for this problem. shares 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 pla ces,e.g..32.16.) EPS Recession Normal Expansion a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to the nearest whole number, e.g, 32.) Percentage changes in EPS Recession 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, e.g., 32.16.) 9

Solution

A-1

Normal

Expansion

recession

EBIT

36000

41400

27000

less interest

0

0

0

EBT

36000

41400

27000

less taxes

0

0

0

EAT

36000

41400

27000

no of shares

6000

6000

6000

EPS = EAT/ no of shares

6

6.9

4.5

A-2 % change in EPS when economy enter into recession or expands

change in EPS when economy enteres into expansion

(6.9-6)/6

15%

change in EPS when economy enteres into recession

(4.5-6)/6

-25%

B-1

Normal

Expansion

recession

EBIT

36000

41400

27000

less interest

7600

7600

7600

EBT

28400

33800

19400

less taxes

0

0

0

EAT

28400

33800

19400

no of shares

2200

2200

2200

EPS = EAT/ no of shares

12.91

15.36

8.82

value of stock

150000

no of shares

6000

per share price

150000/6000

25

no of shares to be purchased

95000/25

3800

no of shares outstanding

6000-2800

2200

B-2 % change in EPS when economy enter into recession or expands

change in EPS when economy enteres into expansion

(15.36-12.91)/12.91

18.98%

change in EPS when economy enteres into recession

(8.82-12.91)/12.91

-31.68%

A-1		Normal	Expansion	recession
EBIT		36000	41400	27000
less interest		0	0	0
EBT		36000	41400	27000
less taxes		0	0	0
EAT		36000	41400	27000
no of shares		6000	6000	6000
EPS = EAT/ no of shares		6	6.9	4.5
A-2 % change in EPS when economy enter into recession or expands
change in EPS when economy enteres into expansion	(6.9-6)/6	15%
change in EPS when economy enteres into recession	(4.5-6)/6	-25%
B-1		Normal	Expansion	recession
EBIT		36000	41400	27000
less interest		7600	7600	7600
EBT		28400	33800	19400
less taxes		0	0	0
EAT		28400	33800	19400
no of shares		2200	2200	2200
EPS = EAT/ no of shares		12.91	15.36	8.82
value of stock		150000
no of shares		6000
per share price	150000/6000	25
no of shares to be purchased	95000/25	3800
no of shares outstanding	6000-2800	2200
B-2 % change in EPS when economy enter into recession or expands
change in EPS when economy enteres into expansion	(15.36-12.91)/12.91	18.98%
change in EPS when economy enteres into recession	(8.82-12.91)/12.91	-31.68%