ch.17 solution - 1 a A table outlining the income statement...

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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 4,000 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 $10,000 $25,000 $35,000 Interest 0 0 0 NI $10,000 $25,000 $35,000 EPS $ 2.50 $ 6.25 $ 8.75 % EPS –60 ––– +40 b. If the company undergoes the proposed recapitalization, it will repurchase: Share price = Equity / Shares outstanding Share price = $200,000/4,000 Share price = $50 Shares repurchased = Debt issued / Share price Shares repurchased =$70,000/$50 Shares repurchased = 1,400
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The interest payment each year under all three scenarios will be: Interest payment = $70,000(.06) = $4,200 The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy under the proposed recapitalization. Recession Normal Expansion EBIT $10,000 $25,000 $35,000 Interest 4,200 4,200 4,200 NI $5,800 $20,800 $30,800 EPS $2.23 $ 8.00 $11.85 % EPS –72.12 ––– +48.08 2. a. A table outlining the income statement with taxes for the three possible states of the economy is
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This note was uploaded on 02/23/2010 for the course FIN 81341 taught by Professor Yang during the Spring '10 term at CSU San Bernardino.

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ch.17 solution - 1 a A table outlining the income statement...

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