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ValentinkaMS [17]
3 years ago
10

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
Business
1 answer:
Stels [109]3 years ago
3 0

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

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Answer:

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Explanation:

All of the following statements are true and correct;

1. Higher financial leverage involves higher risk.

2. Risk is higher if a company has more liabilities.

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4. Lower financial leverage involves lower risk.

However, it is false and an absolutely incorrect to say risk is higher if a company has more assets.

A company having more assets would have a debt ratio less than one (1) because it has many assets to fund it's business. Thus, the company would have little or no debts and as such, it's risk portfolio is very low.

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