Question

Ornaments, Inc., is an all-equity firm with a total market value of $531,000 and 19,600 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $74,700 if the economy is normal. If there is a recession, EBIT will be 15 percent lower, and if there is a boom, EBIT will be 25 percent higher. The tax rate is 34 percent. What is the EPS in a recession

Answer 1

Answer:

The EPS in recession is 2.14 $/share.

Explanation:

If there is a recession, EBIT will be 15% lower than $74,700.

That means an EBIT of $74,700*(1-0.15)=$63,495.

The net income that will be paid in dividends is

Net income = EBIT*(1-tax rate) = $ 63,495 * (1-0.34) = $ 41,906.7

If there are 19,600 shares of stock outstanding and no preferred dividends, the EPS can be calculated as

EPS = (Net dividend pay / common shares) = 41,906.7 / 19,600

EPS = 2.14 $/share.