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# EBIT and the relationship to the economy

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Actually, this question has more to do with EBIT and the relationship to the economy. Let's say my company, Company A has no debt and a market value of \$150,000. My EBIT is projected at \$14,000. If the economy expands, EBIT will be 30% higher - as a contrast, if there's a recession, my EBIT will be 60% lower. I really want to issue about 60,000 of debt with a 5% interest rate. I plan on using the proceeds to repurchase shares of stock - as of today, I have 2500 shares outstanding.

Here's where i need lots of help:

1 - Please help me calculate the earnings per share under each of the 3 economic scenarios prior to any debt being issued.

2 - Please calculate the percentage changes in earnings per share when the economy expands or if we're in a recession

3 - Calculate questions 1 and 2, assuming that my company goes through recapitalization.

4 - Please calculate all questions again assuming my company's tax rate is 35%.

Thank you so much!

#### Solution Summary

Excel file shows calculations of the earnings per share under each of the 3 economic scenarios (current ,economy expands or in a recession) and the percentage changes in earnings per share when the economy expands or if we're in a recession prior to any debt being issued and after recapitalization.

\$2.19

## The relationship between financial leverage and profitability and Intergrative complete ratios analysis

Chapter 2 - P20
The relationship between financial leverage and profitability: Pelican Paper, Inc., and Timberland Forest, Inc., is rivals in the manufacture of craft papers. Some financial statement values for each company follow: Use them in a ratio analysis that compares the firm's financial leverage and profitability.

Item Pelican Paper, Inc. Timberland Forest, Inc.
Total assets \$10,000,000 \$10,000,000
Total Equity \$9,000,000 \$5,000,000
Total debt \$1,000,000 \$5,000,000
Annual interest \$100,000 \$500,000
Total sales \$25,000,000 \$25,000,000
EBIT \$6,250,000 \$6,250,000
Earnings available for
Common stockholders \$3,690,000 \$3, 450, 00

A) Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other.
1) Debt ratio
2) Times interest earned ratio

B) Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other.
1) Operating profit margin

2) Net profit margin

3) Return on total assets

4) Return on common equity

C) In what way has the larger debt of Timberland Forest made it more profitability than Pelican Paper? What are the risks that Timberland's investors undertake when they choose to purchase its stock instead of Pelicanâ??s?

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