Fujita, Incorporated, 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. The company 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.
Fujita, Incorporated, 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. The company 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.
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
Cut off at the bottom is "Expansion percentage change in EPS". Thank you.
Transcribed Image Text:Fujita, Incorporated, 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. The company 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.
Note: 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.
Note: 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.
Note: 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.
Note: 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.
Answer is not complete.
a-1. Recession EPS
Normal EPS
Expansion EPS
a-2. Recession percentage change in EPS
Expansion percentage change in EPS
b-1. Recession EPS
Normal EPS
Expansion EPS
b-2. Recession percentage change in EPS
$
$
$
3.33
4.17
4.58
-20.00
9.83%
$ 17,600.00 X
%
$ 24,200.00 X
-20.00 X %
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