![Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_largeCoverImage.gif)
a)
To determine: The earnings per shares and percentage change in earnings per share under given scenarios.
Introduction:
Earnings per share are the fraction of a firm’s profits allocated to every outstanding share of common stock. Earnings per share are used as an indicator to determine the firm’s profitability.
a)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QP
Solution: The earnings per share value for recession is $2.75, for normal is $4.60 and for expansion is $5.75. The percentage change in earnings per share value for recession is -40%, for normal is 0% and for expansion is 25%.
Explanation of Solution
Calculate the earnings per share (EPS) for the three economic scenarios before any debts issued:
Particulars | Recession | Normal | Expansion |
EBIT | $13,800 | $23,000 | $28,750 |
Less: Interest | $0 | $0 | $0 |
Net income | $13,800 | $23,000 | $28,750 |
Earnings per share | $2.76 | $4.60 | $5.75 |
Percentage change in EPS | -40% | 0% | 25% |
NOTE:
Calculate the earnings before interest and taxes (EBIT):
It is given that earnings before interest and taxes (EBIT) value is $23,000 when the condition is normal. If there is recession, EBIT will be 40% lower and during expansion it will be 25% higher.
Recession:
Earnings before interest and taxes (EBIT):
Therefore, the earnings before interest and taxes for recession is $13,800.
Expansion:
Earnings before interest and taxes (EBIT):
Therefore, the earnings before interest and taxes for expansion is $28,750.
Calculate the earnings per share (EPS):
The net income value for recession, normal and expansion are $6,720, $15,920 and $21,670 respectively. It is given that shares outstanding are 5,000.
Recession:
Earnings per share (EPS):
Therefore, the earnings per share for recession is $2.76.
Normal:
Earnings per share (EPS):
Therefore, the earnings per share for normal is $4.60.
Expansion:
Earnings per share (EPS):
Therefore, the earnings per share for expansion is $5.75.
Calculate the percentage change in EPS:
Recession:
Therefore, the percentage change in EPS is -40%.
Normal:
Therefore, the percentage change in EPS is 0%.
Expansion:
Therefore, the percentage change in EPS is 25%.
b)
To determine: The earnings per shares and percentage change in earnings per share when company goes through recapitalization.
b)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QP
Solution: The earnings per share value for recession is $1.92, for normal is $4.55 and for expansion is $6.19. The percentage change in earnings per share value for recession is -57.79%, for normal is 0% and for expansion is 36.12%.
Explanation of Solution
When company goes through recapitalization, then it will have to repurchase.
Calculate the share price:
It is given that the market value is $295,000 and shares outstanding are 5,000.
Therefore, the share price is $59.
Calculate the shares repurchased:
It is given that the company is considering issuing $88,500 debts.
Therefore, the shares repurchased are 1,500.
Calculate the interest payment for each year:
It is given that the company is considering issuing $88,500 debts and interest payment is 8%.
Therefore, the interest payment is $7,080.
Now, calculate the earnings per share.
Particulars | Recession | Normal | Expansion |
EBIT | $13,800 | $23,000 | $28,750 |
Less: Interest | $7,080 | $7,080 | $7,080 |
Net income | $6,720 | $15,920 | $21,670 |
Earnings per share | $1.92 | $4.55 | $6.19 |
Percentage change in EPS | -57.79% | 0% | 36.12% |
NOTE:
Calculate the earnings before interest and taxes (EBIT):
It is given that earnings before interest and taxes (EBIT) value is $23,000 when the condition is normal. If there is recession, EBIT will be 40% lower and during expansion it will be 25% higher.
Recession:
Earnings before interest and taxes (EBIT):
Therefore, the earnings before interest and taxes for recession is $13,800.
Expansion:
Earnings before interest and taxes (EBIT):
Therefore, the earnings before interest and taxes for expansion is $28,750.
Calculate the earnings per share (EPS):
The net income value for recession, normal and expansion are $13,800, $23,000 and $28,750 respectively. It is given that shares outstanding are 5,000.
Recession:
Earnings per share (EPS):
Therefore, the earnings per share for recession is $1.92.
Normal:
Earnings per share (EPS):
Therefore, the earnings per share for normal is $4.55.
Expansion:
Earnings per share (EPS):
Therefore, the earnings per share for expansion is $6.19.
Calculate the percentage change in EPS:
Recession:
Therefore, the percentage change in EPS is -57%.
Normal:
Therefore, the percentage change in EPS is 0%.
Expansion:
Therefore, the percentage change in EPS is 36%,
Want to see more full solutions like this?
Chapter 16 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- (2x76m A = + S) Waterfront Inc. wishes to borrow on a short-term basis without reducing its current ratio below 1.25. At present its current assets and current liabilities are $1,600 and $1,000 respectively. How much can Waterfront Inc. borrow?arrow_forwardExpected Standard Stock Return Beta Deviation A B 12% 16 0.75 1.25 28% 37 The market index has a standard deviation of 22% and the risk-free rate is 9%. Required: a. What are the standard deviations of stocks A and B? b. Suppose that we were to construct a portfolio with proportions: Stock A Stock B T-bills 0.25 0.50 0.25 Compute the expected return, beta, nonsystematic standard deviation, and standard deviation of the portfolio. Complete this question by entering your answers in the tabs below. Required A Required B What are the standard deviations of stocks A and B? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Stock A 0.33 % Stock B 0.46 %arrow_forwardDon't used hand raiting and don't used Ai solutionarrow_forward
- Could you explain what are the Biblical principles researchers that can follow to mitigate researcher bias? How to use of Biblical ethics to synthesize the literature to avoid misrepresentation of the literature? How researchers can demonstrate Biblical ethics when collecting and analyzing data?arrow_forwardThe manager of company A is thinking about adding an air conditioner to the office. The AC will cost $1630 to buy and install. The manager plans to use the AC for 5 years and each year's depreciation rate is 18% of the purchase price. The manager expects to sell the AC in 5 years for $880.The tax rate is 15% and the company's WACC is 15%. If the manager considers this purchase of AC as an investment, what is the NPV (keep two decimal places and assume that the AC will not affect the operations of the company)?arrow_forwardProblem 5-5 Calculating IRR A firm has a project with the following cash flows: Year Cash Flow 0 -$27,700 1 23 11,700 14,700 10,700 The appropriate discount rate is 18 percent. What is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %arrow_forward
- Could you help to explain: How researchers can demonstrate Biblical ethics when conducting a literature review? How researchers can demonstrate Biblical ethics when communicating with a research team or university committee? How researchers can demonstrate Biblical ethics when recruiting participants. Provide Biblical and/or scholarly support for all assertions?arrow_forwardCould you please help explain what is the Biblical ethics in research? How do they establish a firm ethical foundation based on Biblical principles? What should they do to reduce the researcher bias as well as misrepresenting the literature and study findings? How Christians would like to ensure of being obedient to God in the research and study conduct?arrow_forwardI need answer typing clear urjent no chatgpt used pls i will give 5 Upvotes.arrow_forward
- < When you purchased your car, you took out a 5-year annual-payment loan with an interest rate of 5% per year. The annual payment on the car is $5,200. You have just made a payment and have now decided to pay off the loan by repaying the outstanding balance. What is the payoff amount for the following scenarios? a. You have owned the car for 1 year (so there are 4 years left on the loan)? b. You have owned the car for 4 years (so there is 1 year left on the loan)? a. You have owned the car for 1 year (so there are 4 years left on the loan)? The payoff if there are 4 years left on the loan is $ (Round to the nearest cent.) b. You have owned the car for 4 years (so there is 1 year left on the loan)? The payoff if there is 1 year left on the loan is $ (Round to the nearest cent.)arrow_forwardVictoria Exports (Canada). A Canadian exporter, Victoria Exports, will be receiving six payments of €13,800, ranging from now to 12 months in the future. Since the company keeps cash balances in both Canadian dollars and U.S. dollars, it can choose which currency to exchange the euros for at the end of the various periods. Which currency appears to offer the better rates in the forward market? (Click on the icon to import the table into a spreadsheet.) Period Days Forward spot 1 month C$/euro 1.3347 1.3370 US$/euro 1.3219 1.3224 m 2 months 3 months 1.3392 30 60 1.3229 90 1.3235 180 1.3438 12 months 360 1.3464 1.3239 1.3269 6 months 1.3416 Calculate the forward premium, the Canadian dollar proceeds, and the difference from the spot rate proceeds in the C$/Euro forward market below: (Round the forward premium to three decimal places and the Canadian dollar amounts to the nearest cent.) Days Forward Premium C$ Proceeds of Difference Period Forward C$/euro on the C$/euro €13,800 Over Spot…arrow_forwardidentify the primary sources of financing, both traditional and alternative, accessible to companies seeking sources of funding. To do so, you should: Collect and curate data and documentary resources from various sources (magazine articles, newspapers, online content, working papers from various institutions, activity reports, performance reports, legal regulations, speeches, appearances, press conferences, etc.). Analyze the documentary content you have previously curated and collected. During your analysis, consider the context, location, timing, and target audience of the texts. Reference Article: One Park Financial. (2022). Best alternative business loans and financing for entrepreneurs. https://www.oneparkfinancial.com/blog/alternative-business-funding Questions: Identify and summarize the traditional financial avenues available to businesses. What are the most innovative financing options they could find? Open-ended question: if you were in the opposite position, as an…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
![Text book image](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)