Question: rak inc has no debt outstanding and a total market...
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RAK, Inc., has no debt outstanding and a total market value of $140,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 30 percent lower. RAK is considering a $115,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,000 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.) |
EPS | ||
Recession | $ 3.20 (correct) | |
Normal | $ 4.57 (correct) | |
Expansion | $ 5.12 (correct) | |
a-2 |
Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
Percentage changes in EPS | ||
Recession | -29% (incorrect) | |
Expansion | 12% (Correct) | |
b-1 |
Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
EPS | ||
Recession | $ 2.25 (incorrec) | |
Normal | $ 4.64 (incorrect) | |
Expansion | $ 5.19 (incorrect) | |
b-2 |
Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
Percentage changes in EPS | |
Recession | -51% incorrect |
Expansion | 12% incorrect |