Question

Ornaments, Inc., is an all-equity firm with a total market value of $608,000 and 27,300 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $86,600 if the economy is normal. If there is a recession, EBIT will be 25 percent lower, and if there is a boom, EBIT will be 35 percent higher. The tax rate is 35 percent. What is the EPS in a recession

Answer 1

Answer:

The EPS in recession is $1.546 per share.

Explanation:

The earnings per share or EPS is a function of net income divided by the number of shares outstanding. The earnings per share calculates the dollar return per share that is earned in a year.

Earnings per share = Net Income / No of common shares outstanding

Where, Net Income = EBIT - Interest - Tax

The EBIT in recession will be = 86600 * (1-0.25) = $64950

The company is all equity financed so there is no interest cost.

Net Income in recession will be = 64950 - (64950 * 35%)  =  $42217.5

Thus, EPS in recession = 42217.5 / 27300  =  $1.546 per share