Answer:
Beckett, Inc.
Earnings Per Share:
a-1. Earnings Per Share:
Economic Conditions                          Normal    Expansion  Recession
Earnings before interest and taxes = $30,000  $35,400      $24,000
Earnings per share:
Recession = $24,000/8,000                                                       $3.00
Normal = $30,000/8,000                   $3.75
Expansion = $35,400/8,000                                    $4.43
a-2. Percentage changes in EPS:
Recession = -$0.75/$3.75 x 100 = -20%
Expansion = $0.68/$3.75 x 100 = 18.13%
b-1. EPS after recapitalization:
Economic Conditions                          Normal    Expansion  Recession
Earnings before interest and taxes = $30,000  $35,400      $24,000
Interest at 8%                                         $8,000    $8,000        $8,000
Earnings after interest                        $22,000  $27,400       $16,000
Earnings per share:
Recession = $16,000/8,000                                                       $2.00
Normal = $22,000/8,000                   $2.75
Expansion = $27,400/8,000                                    $3.43
b-2. Percentage changes in EPS:
Recession: -$0.75/$2.75 x 100 = -27.27%
Expansion:  $0.68/$2.75 x 100 = 24.73%
Explanation:
1. Data:
Market Value = $200,000
Economic Conditions                          Normal    Expansion  Recession
Earnings before interest and taxes = $30,000  $35,400      $24,000
Issue of debt for $75,000 with 8% interest
Proceeds to repurchase shares of stock.
Outstanding shares = 8,000
Ignore taxes