Pendergast Inc. has no debt outstanding and a total market value of $200000. Earnings before interest and taxes EBIT are projected to be
$24000 if economic conditions are normal. If there is strong expansion in the economy then EBIT will be 15 percent higher. If there is a
recession then EBIT will be 30 percent lower. Pendergast is considering a $70000 debt issue with an interest rate of 7 percent. The proceeds
will be used to repurchase shares of stock. There are currently 8000 shares outstanding. Ignore taxes for this problem.
a-1 Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.
Expansion______ a-2 Calculate the percentage changes in EPS when the economy expands or enters a recession.
b-1 Assume that the company goes through with recapitalization. Calculate earnings per share (EPS)
under each of the three economic scenarios assuming the company goes through with recapitalization
b-2 Given the recapitalization calculate the percentage changes in EPS when the economy expands or
enters a recession
Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan
II). Under Plan I the company would have 150000 shares of stock outstanding. Under Plan II there would be 100000 shares of stock
outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.
a) If EBIT is $300000 what is the EPS for each plan?
Plan I ______
Plan II ______ b) If EBIT is $550000 what is the EPS for each plan?
Plan I ______
Plan II ______
c) What is the break-even EBIT?