Problem 13-1 EBIT and Leverage [LO 1 Kaelea, Inc., has no debt outstanding and a
ID: 2721337 • Letter: P
Question
Problem 13-1 EBIT and Leverage [LO 1 Kaelea, Inc., has no debt outstanding and a total market value of $120,000. Eanings before interest and taxes, EBIT, are projected to be $9,200 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $37,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,800 shares outstanding. Ignore taxes for this problem. Requirement 1 Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Nomal 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. Round your answers to 2 decimal places (e.g., 32.16).) Requirement 2 Assume Kaelea goes through with recapitalization. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Roundyour answers to 2 decimal places (e.g., 32.16).) NormalExplanation / Answer
Requirement 1 :
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Requirement 2:
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b.
EPS Recession $ 1.28 Normal $ 1.92 Expansion $ 2.34