Problem 16-1 EBIT and Leverage [LO1] Fujita, Incorporated, has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 25 percent lower. The company is considering a $125,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 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 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. (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.) 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 answers to 2 decimal places, e.g., 32.16.) b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (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.)
Problem 16-1 EBIT and Leverage [LO1] Fujita, Incorporated, has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 25 percent lower. The company is considering a $125,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 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 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. (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.) 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 answers to 2 decimal places, e.g., 32.16.) b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Problem 16-1 EBIT and Leverage [LO1]
Fujita, Incorporated, has no debt outstanding and a total market value of $220,000.
Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be 18
percent higher. If there is a recession, then EBIT will be 25 percent lower. The company
is considering a $125,000 debt issue with an interest rate of 8 percent. The proceeds
will be used to repurchase shares of stock. There are currently 11,000 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
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. (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.)
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 answers to 2 decimal places, e.g.,
32.16.)
b-2. Given the recapitalization, calculate the percentage changes in EPS when the
economy expands or enters a recession. (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
a-1. Normal EPS
Answer is not complete.
$
a-1. Expansion EPS
a-2. Recession percentage change in EPS
a-2. Expansion percentage change in EPS
b-1. Recession EPS
b-1. Normal EPS
b-2. Expansion EPS
b-2. Recession percentage change in EPS
b-2. Expansion percentage change in EPS
$
$
$
$
$
2.45
3.27
4.44 X
-25.08
%
35.78 X %
3.58
5.47
8.18 X
%
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5fa70c8e-c2c0-4088-8b85-2c424d967865%2F1338538d-04f6-41e5-ac1b-ce054fca5a43%2Ffem665m_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 16-1 EBIT and Leverage [LO1]
Fujita, Incorporated, has no debt outstanding and a total market value of $220,000.
Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be 18
percent higher. If there is a recession, then EBIT will be 25 percent lower. The company
is considering a $125,000 debt issue with an interest rate of 8 percent. The proceeds
will be used to repurchase shares of stock. There are currently 11,000 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
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. (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.)
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 answers to 2 decimal places, e.g.,
32.16.)
b-2. Given the recapitalization, calculate the percentage changes in EPS when the
economy expands or enters a recession. (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
a-1. Normal EPS
Answer is not complete.
$
a-1. Expansion EPS
a-2. Recession percentage change in EPS
a-2. Expansion percentage change in EPS
b-1. Recession EPS
b-1. Normal EPS
b-2. Expansion EPS
b-2. Recession percentage change in EPS
b-2. Expansion percentage change in EPS
$
$
$
$
$
2.45
3.27
4.44 X
-25.08
%
35.78 X %
3.58
5.47
8.18 X
%
%
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![Problem 16-1 EBIT and Leverage [LO1]
Fujita, Incorporated, has no debt outstanding and a total market value of $220,000.
Earnings before Interest and taxes, EBIT, are projected to be $36,000 of economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be 18
percent higher. If there is a recession, then EBIT will be 25 percent lower. The company
is considering a $125,000 debt Issue with an interest rate of 8 percent. The proceeds
will be used to repurchase shares of stock. There are currently 11,000 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
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. (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.)
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 answers to 2 decimal places, e.g.,
32.16.)
b-2. Given the recapitalization, calculate the percentage changes in EPS when the
economy expands or enters a recession. (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
a-1. Normal EPS
Answer is complete but not entirely correct.
a-1. Expansion EPS
a-2. Recession percentage change in EPS
a-2. Expansion percentage change in EPS
b-1. Recession EPS
b-1. Normal EPS
b-2. Expansion EPS
b-2. Recession percentage change in EPS
b-2. Expansion percentage change in EPS
$
$
S
$
$
$
2.45
3.27
3.86
-25.08
18.04
3.58
>>>>
%
%6
5.47
6.84
24.92 X
%
34.62 x %](https://content.bartleby.com/qna-images/question/5fa70c8e-c2c0-4088-8b85-2c424d967865/cd51c5b0-7b06-4a92-9bd5-446581e9f1c5/l4y7oqu_processed.png)
Transcribed Image Text:Problem 16-1 EBIT and Leverage [LO1]
Fujita, Incorporated, has no debt outstanding and a total market value of $220,000.
Earnings before Interest and taxes, EBIT, are projected to be $36,000 of economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be 18
percent higher. If there is a recession, then EBIT will be 25 percent lower. The company
is considering a $125,000 debt Issue with an interest rate of 8 percent. The proceeds
will be used to repurchase shares of stock. There are currently 11,000 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
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. (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.)
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 answers to 2 decimal places, e.g.,
32.16.)
b-2. Given the recapitalization, calculate the percentage changes in EPS when the
economy expands or enters a recession. (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
a-1. Normal EPS
Answer is complete but not entirely correct.
a-1. Expansion EPS
a-2. Recession percentage change in EPS
a-2. Expansion percentage change in EPS
b-1. Recession EPS
b-1. Normal EPS
b-2. Expansion EPS
b-2. Recession percentage change in EPS
b-2. Expansion percentage change in EPS
$
$
S
$
$
$
2.45
3.27
3.86
-25.08
18.04
3.58
>>>>
%
%6
5.47
6.84
24.92 X
%
34.62 x %
Solution
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