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

**Description**

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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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