# Rak, inc., has no debt outstanding and a total market value of

RAK, Inc., has no debt outstanding and a total market value of \$250,000. Earnings before interest and taxes, EBIT, are projected to be \$40,000 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 20 percent lower. RAK is considering a \$105,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. RAK has a tax rate of 35 percent.
2-1 Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
EPS
Recession 12.80
Normal 16.00
Expansion 19.20
a-2Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Percentage changes in EPS
Recession -20.00 0%
Expansion 20.00 0%
b-1 Calculate earnings per share (EPS) 111011 1301 of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
EPS
Recession 19.17
Normal 24.69
Expansion 30.21
b-2 Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Pltblttoglbt2t.3th in EPS
Recession -22.31 0 %
Expansion MEE %
…………………………………………………………………………………………………………………………………………………………….

(a-1)

EPS

Recession

2.08

Normal

2.60

Expansion

3.12

(a-2)

Percentage Change in EPS

Recession

-20.00%

Expansion

20.00%

(b-1)

EPS

Recession

3.12

Normal

4.01

Expansion

4.91

(b-2)

Percentage Change in EPS

Recession

-22.35%

Expansion

22.35%

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