Pendergast, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $24,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $70,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,000 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. Recession____ Normal_____ Expansion______ a-2 Calculate the percentage changes in EPS when the economy expands or enters a recession. Recession___% Expansion____ % b-1 Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization Recession_____ Normal______ Expansion______ b-2 Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession Recession____% Expansion_____% Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes. a) If EBIT is $300,000, what is the EPS for each plan? Plan I ______ Plan II ______ b) If EBIT is $550,000, what is the EPS for each plan? Plan I ______ Plan II ______ c) What is the break-even EBIT?
economic scenarios + Recession/ Expansion
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