Business, 16.10.2020 14:01 addisonborden

Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest and taxes, EBIT, are projected to be $14,300 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. The company is considering a $33,900 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,500 shares outstanding. Assume the company has a tax rate of 21 percent. 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 after the recapitalization.
d. Calculate the percentage changes in EPS when the economy expands or enters a recession assuming recapitalization has occurred.

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Answer from: nyceastcoast

EPS and percentage change is calculated below

Explanation:

Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company.

a.EPS

Recession Normal Expansion

EBIT 9,295 14,300 17,160

Less: Interest 0 0 0

Earnings before taxes9,295 14,300 17,160

Less: Taxes (1,952) (3,003) (3,604 )

Net Income 7,343 11,297 13,556

Number of Shares 7,500 7,500 7,500

EPS 0.979073 1.506267 1.80752

b. Percentage change

Recession = (2.683-3.833)/3.833

Recession = -35.00%

Expansion20.00%

c. EPS

RecessionNormalExpansion

EBIT 9,295 14,300 17,160

Less: Interest (2034) (2034) (2034 )

Earnings before taxes 7,261 12,266 15,126

Less: Taxes (1,525) (2,576) (3,176 )

Net Income 5,736 9,690 11,950

Number of Shares 6,300 6,300 6,300

EPS 0.91 1.53 1.89

d. Percentage change

Recession = (2.683-3.833)/3.833

Recession = -40.80%

Expansion23.32%

Value per share = 211875/7500 = $28.25

Number of shares bought back = 33900/28.25 = 1200 shares

Answer from: Quest

u = 30

continuing your method

$\frac{1}{10}$ = $\frac{1}{u}$ + $\frac{1}{15}$

subtract $\frac{1}{15}$ from both sides

$\frac{1}{u}$ = $\frac{1}{10}$ - $\frac{1}{15}$ thus

$\frac{1}{u}$ = $\frac{3}{30}$ - $\frac{2}{30}$

$\frac{1}{u}$ = $\frac{1}{30}$ ⇒ u = 30

Answer from: Quest

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Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest...

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