# 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%