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Money, Inc., has no debt outstanding and a total market value of-(Answered)

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Question

Money, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 20 percent lower. Money is considering a $60,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 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. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

? EPS
??Recession $ ?
??Normal $ ?
??Expansion $ ?
a-2.

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

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 final answers to 2 decimal places. (e.g., 32.16))

? EPS
??Recession $ ?
??Normal $ ?
??Expansion $ ?
b-2.

Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))


Percentage changes in EPS
??Recession % ?
??Expansion

% ?


SOLUTION

 


 

a)

 


 

Earning before Interest & Tax

 

Less: Interest

 

Earning afte tax

 

No.of Shares

 

EPS

 

Percentage Change in EPS

 


 

Economy

 

Normal

 

Expansion Recession

 

23000

 

27600

 

16100

 

0

 

0

 

0

 

23000

 

27600...

 

Paper#9209157 | Written in 27-Jul-2016

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