MGMT 332 Corporate Finance I
Wing Air, Inc. has no debt outstanding and a total market value of $250,000. Earnings before
interest and taxes (EBIT) are projected to be $25,000 if economic conditions are normal. If the
economy is strong then EBIT will be 20% percent higher. In the event of a recession, EBIT will
be 35% percent lower. Wing Air is considering a $96,000 debt issue with an interest rate of 6%
percent. The proceeds of which will be used to repurchase shares of stock. There are currently
6,000 shares outstanding. Ignore taxes for this problem.
Calculate the earnings per share (EPS) under each of the three scenarios before any debt
Calculate the percentage change in EPS when the economy expands or enters a recession.