Dilana Corporation., has no debt outstanding and a total capital of $600,000. Operatingearnings (Earnings before interest and taxes, EBIT) are projected to be $30,000 if economicconditions are normal, $50,000 if conditions are good, and $0 if conditions are bad. Theeconomic conditions are expected to be good with probability of 25%, normal with probability of50%, and bad with a probability of 25%. Dilana is considering a $120,000 debt issue with a 10%interest rate. The proceeds will be used to repurchase shares of stock. There are currently12,000 shares outstanding. Ignore taxes in this question.(a) What is the current share price?(b) Calculate earnings per share [EPS] under each of the three economic scenarios before anydebt is issued. Also calculate the expected EPS.(c) Calculate return on equity [ROE] under each of the three economic scenarios before anydebt is issued. Also calculate the expected ROE.d) Repeat part (b) assuming that Dilana goes through with recapitalization. What do youobserve?

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Answered: Dilana Corporation., has no debt…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...

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