Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32. b-1. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. Calculate the percentage changes in EPS when the economy expands or enters a recession assuming recapitalization has occurred. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a-1. Recession EPS Normal EPS Expansion EPS a-2. Recession percentage change in EPS Expansion change in EPS b-1. Recession EPS Normal EPS b-2. Expansion EPS Recession percentage change in EPS Expansion change in EPS % % % %
Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32. b-1. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. Calculate the percentage changes in EPS when the economy expands or enters a recession assuming recapitalization has occurred. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a-1. Recession EPS Normal EPS Expansion EPS a-2. Recession percentage change in EPS Expansion change in EPS b-1. Recession EPS Normal EPS b-2. Expansion EPS Recession percentage change in EPS Expansion change in EPS % % % %
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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Transcribed Image Text:Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are
projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25
percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with
an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares
outstanding. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.
a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.
Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.
a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers
as a percent rounded to the nearest whole number, e.g., 32.
b-1. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.
Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.
b-2. Calculate the percentage changes in EPS when the economy expands or enters a recession assuming recapitalization has
occurred.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers
as a percent rounded to 2 decimal places, e.g., 32.16.
a-1. Recession EPS
Normal EPS
Expansion EPS
a-2. Recession percentage change in EPS
Expansion change in EPS
b-1. Recession EPS
Normal EPS
b-2. Expansion EPS
Recession percentage change in EPS
Expansion change in EPS
%
%
%
%
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