Explore BrainMass
Share

Explore BrainMass

    Acme Corporation: EPS and Percent Change in economy expansion and recession

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Acme Corporation has no debt outstanding and a total market value of $12,000,000. Earnings before interest and taxes (EBIT) are projected to be $1,100,000 if economic conditions are normal. If there is a strong expansion in the economy then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 75 percent lower. Acme is considering a $5,000,000 debt issue with a 7 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 1,000,000 shares outstanding. Ignore taxes for this problem.

    Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.

    Also, calculate the percentage changes in EPS when the economy expands or enters a recession.

    Finally, repeat the calculations (EPS and percent change in EPS) that will result if Acme goes through with its plans to issue the bonds and repurchase stock

    © BrainMass Inc. brainmass.com October 9, 2019, 3:25 pm ad1c9bdddf
    https://brainmass.com/business/accounting/acme-corporation-eps-and-percent-change-in-economy-expansion-and-recession-3907

    Solution Preview

    See attached file.

    When there is no debt:

    Growth Normal Recession
    EBIT 1,375,000.00 1,100,000.00 275,000.00
    Interest Nil Nil Nil
    Tax Nil Nil Nil
    Earnings 1,375,000.00 1,100,000.00 275,000.00
    Number of shares outstanding ...

    Solution Summary

    The attached Excel spreadsheet clearly lays out the problems and solved them as requested.

    $2.19