Question

Control Inc. has no debt and a total market value of $100,000. EBIT are projected to be 6,000 if economic conditions are normal. If there is an expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Control Inc. is considering a $40,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. Currently there are 2500 shares outstanding. Ignore taxes.
1. Calculate earning per share for the case of strong expansion period before any debt is issued:

3.12

3.95

4.82

5.18

6.02

Answer 1

Answer:

$3.12

Explanation:

For expansion:

EBT = EBIT - Interest

       = [6,000 + (30% × 6,000)] - $0

      = $7,800

Net income = EBT - Tax

                   = $7,800 - $0

                   = $7,800

Earning per share for the case of strong expansion period before any debt is issued:

= Net income ÷ Number of shares outstanding

= $7,800 ÷ 2,500

= $3.12