Answer:
Ghost Inc.
A1.
Earnings Per share (EPS)
EPS in normal projection is $4.61 per share
EPS in an expansion is $5.31 Per share
EPS in a recession is $3.51 Per share
A2.
Changes to EPS in an expansion is +15.18%
Changes to EPS in a recession is -23.86%
B1.
Earnings Per share (EPS)
EPS in normal projection is $7.23 per share
EPS in an expansion is $8.62 Per share
EPS in a recession is $5.01 Per share
B2.
Changes to EPS in an expansion is +19.23%
Changes to EPS in a recession is -30.71%
Step-by-step explanation:
<u>Underlying Information:</u>
Earnings before interest and taxes, EBIT projections = $51,000
Expansionary EBIT projections = $51,000 x (100% + 15%) = $58,650
Recessionary EBIT projections = $51,000 x (100% -24%) = $38,760
Tax Rate = 24%
Market to Book Ratio = 1.0
Stock Price is constant.
Solution to A1.
<u>Scenario 1 (Projected Earnings)</u>
Earnings Per Share (EPS) = Net Income (Earnings after Tax) divided by Outstanding Shares in Issue
Net Income = EBIT minus tax = $51,000 - ($51,000 x 24%)
= $51,000 - $12240
= $38,760
Outstanding shares in issue = 8,400 ordinary Shares
EPS = $38,760 divided by 8,400 shares = $4.61 Per share
<u>Scenario 2 (Projected Earnings in a strong expansion)</u>
Earnings Per Share (EPS) = Net Income (Earnings after Tax) divided by Outstanding Shares in Issue
Net Income = EBIT minus tax = $58,650 - ($58,650 x 24%)
= $58,650 - $14,076
= $44,574
Outstanding shares in issue = 8,400 ordinary Shares
EPS = $44,574 divided by 8,400 shares = $5.31 Per share
<u>Scenario 3 (Projected Earnings in a Recession)</u>
Earnings Per Share (EPS) = Net Income (Earnings after Tax) divided by Outstanding Shares in Issue
Net Income = EBIT minus tax = $38,760 - ($38,760 x 24%)
= $38,760 - $9,302.4
= $29,457.6
Outstanding shares in issue = 8,400 ordinary Shares
EPS = $44,574 divided by 8,400 shares = $3.51 Per share
Solution to A2.
1.Changes to EPS in an expansion = EPS (Expansion) minus EPS (normal projection), all divided by EPS (normal projection)
= (5.31 - 4.61) / 4.61
= +15.18% change during an expansion
2.Changes to EPS in a recession = EPS (Recession) minus EPS (normal projection), all divided by EPS (normal projection)
= (3.51 - 4.61) / 4.61
= -23.86% change during a recession
<u>Underlying Information:</u>
Debt issue = $185,000
Interest on debt issued = 6% = $11,100
Market to Book Ratio = 1.0
Stock Price is constant.
Therefore Share Price = Market Value divided by Outstanding shares in issue = 369,600 / 8400 = $44
This implies our proceeds of $185,000 from debt issue would have repurchased $185,000 divided by $44 = 4,205 ordinary shares
This decision to repurchase its shares indicates the shares outstanding will reduce by 4,205. New outstanding shares will now be 4,195 shares
*Earnings before interest and taxes, EBIT normal projections = $51,000 & Earnings Before Tax (EBT) = $51,000 minus $11,100 (debt interest) = $39,900
*Expansionary EBIT projections = $51,000 x (100% + 15%) = $58,650 & Earnings Before Tax = $58,650 minus $11,100 (debt interest) = $47,550
*Recessionary EBIT projections = $51,000 x (100% -24%) = $38,760 & Earnings Before Tax = $38,760 minus $11,100 (debt interest) = $27,660
Tax Rate = 24%
Solution to B1.
<u>Scenario 1 (Projected Earnings)</u>
Earnings Per Share (EPS) = Net Income (Earnings after Tax) divided by Outstanding Shares in Issue
Net Income = EBT minus tax = $39,900 - ($39,900 x 24%)
= $39,900 - $9,576
= $30,324
Outstanding shares in issue = 4,195 ordinary Shares
EPS = $30,324 divided by 4,195 shares = $7.23 Per share
<u>Scenario 2 (Projected Earnings in a strong expansion)</u>
Earnings Per Share (EPS) = Net Income (Earnings after Tax) divided by Outstanding Shares in Issue
Net Income = EBT minus tax = $47,550 - ($47,550 x 24%)
= $47,550 - $11,412
= $36,138
Outstanding shares in issue = 4,195 ordinary Shares
EPS = $36,138 divided by 4,195 shares = $8.62 Per share
<u>Scenario 3 (Projected Earnings in a Recession)</u>
Earnings Per Share (EPS) = Net Income (Earnings after Tax) divided by Outstanding Shares in Issue
Net Income = EBT minus tax = $27,660 - ($27,660 x 24%)
= $27,660 - $6,638.40
= $21,021.60
Outstanding shares in issue = 4,195 ordinary Shares
EPS = $21,021.60 divided by 4,195 shares = $5.01 Per share
Solution to B2.
1.Changes to EPS in an expansion = EPS (Expansion) minus EPS (normal projection), all divided by EPS (normal projection)
= (8.62 - 7.23) / 7.23
= +19.23% change during an expansion
2.Changes to EPS in a recession = EPS (Recession) minus EPS (normal projection), all divided by EPS (normal projection)
= (5.01 - 7.23) / 7.23
= -30.71% change during a recession