M Inc. has no debt outstanding and has a total market value of $180,000. Under normal conditionsearnings before interest and taxes (EBIT) are projected to be $28,000. Under expansion EBIT willbe 14% higher and under recession EBIT will be 25% lower. M Inc is considering repurchase of thestock by issuing the 8% debt of $90,000. Current outstanding share of the company is 10,000.Calculate the percentage change in EPS under expansion and after recapitalization the percentagechange in EPS under recession? Consider a tax rate of 25%.

PARTICULARS Normal condition Recapitalization under expansion Recapitalization and under recession…

Answered: Calculate the percentage change in EPS…

Calculate the percentage change in EPS under expansion and after recapitalization the percentage change in EPS under recession? Consider a tax rate of 25%.

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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Question

M Inc. has no debt outstanding and has a total market value of $180,000. Under normal conditions
earnings before interest and taxes (EBIT) are projected to be $28,000. Under expansion EBIT will
be 14% higher and under recession EBIT will be 25% lower. M Inc is considering repurchase of the
stock by issuing the 8% debt of $90,000. Current outstanding share of the company is 10,000.
Calculate the percentage change in EPS under expansion and after recapitalization the percentage
change in EPS under recession? Consider a tax rate of 25%.

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