Business, 27.04.2021 15:30, Domi0129

Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering a $65,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. Required:
a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.
b. Calculate the percentage changes in EPS when the economy expands or enters a recession.
c. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization.
d. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

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Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest...