Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest and taxes, EBIT, are projected to be $14,300 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 35 percent lower. The company is considering a $33,900 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,500 shares outstanding. Assume the company has a tax rate of 21 percent. Required:
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.
b. Calculate the percentage changes in EPS when the economy expands or enters a recession.
c. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.
d. Calculate the percentage changes in EPS when the economy expands or enters a recession assuming recapitalization has occurred.

EPS and percentage change is calculated below

Explanation:

Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company.

a.EPS

                           Recession          Normal        Expansion

EBIT                       9,295                14,300       17,160

Less: Interest                    0                    0              0

Earnings before taxes9,295          14,300        17,160

Less: Taxes                  (1,952)           (3,003)      (3,604 )

Net Income                 7,343           11,297          13,556

Number of Shares         7,500            7,500           7,500

EPS                               0.979073      1.506267          1.80752

b. Percentage change    

Recession =    (2.683-3.833)/3.833

Recession =   -35.00%  

Expansion20.00%  

c. EPS

                                              RecessionNormalExpansion

EBIT                                    9,295          14,300    17,160

Less: Interest                            (2034)           (2034)     (2034 )

Earnings before taxes             7,261           12,266     15,126

Less: Taxes                             (1,525)            (2,576)      (3,176 )

Net Income                             5,736            9,690      11,950

Number of Shares                     6,300            6,300      6,300

EPS                                             0.91             1.53        1.89

d. Percentage change    

Recession = (2.683-3.833)/3.833

Recession = -40.80%  

Expansion23.32%  

Value per share = 211875/7500 = $28.25  

Number of shares bought back = 33900/28.25 = 1200 shares

answer; ///blank(1); rate-buster; blank(2) systematic soldiering;

answer; strategic planning;