SolutionsExerciseBook7th_Chap16.pdf - Chapter 16 Capital Structure Basic Concepts 16.1 a A table outlining the income statement for the three possible

# SolutionsExerciseBook7th_Chap16.pdf - Chapter 16 Capital...

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Answers to End-of-Chapter Problems 16-1 Chapter 16 : Capital Structure: Basic Concepts 16.1 a. A table outlining the income statement for the three possible states of the economy is shown below. The EPS is the net income divided by the 5,000 shares outstanding. The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy. Recession Normal Expansion EBIT \$12,600 \$21,000 \$26,250 Interest 0 0 0 NI \$12,600 \$21,000 \$26,250 EPS \$ 2.52 \$ 4.20 \$ 5.25 % EPS 40 ––– +25 b. If the company undergoes the proposed recapitalization, it will repurchase: Share price = Equity / Shares outstanding Share price = \$275,000/5,000 Share price = \$55 Shares repurchased = Debt issued / Share price Shares repurchased =\$99,000/\$55 Shares repurchased = 1,800 shares Shares outstanding = 5,000 1,800 Shares outstanding = 3,200 shares The interest payment each year under all three scenarios will be: Interest payment = \$99,000(0.08) = \$7,920 The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy under the proposed recapitalization.

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