Question

Northern Wood Products is an all-equity firm with 16,300 shares of stock outstanding and a total market value of $354,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $27,000 if the economy is normal, $14,800 if the economy is in a recession, and $39,200 if the economy booms. Ignore taxes. Management is considering issuing $88,600 of debt with an interest rate of 8 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession

Answer 1

$0.63

Step-by-step explanation:

Calculation for What will the earnings per share be if the debt is issued and the economy is in a recession

First step is to calculate the Shares repurchased

Shares repurchased=$88,600/($354,000/16,300)

Shares repurchased=$88,600/21.7

Shares repurchased = 4,083 shares

Second step is to calculate the Shares outstanding

Shares outstanding = 16,300 - 4,083

Shares outstanding= 12,217shares

Last step is to calculate earnings per share recession

Earnings per share Recession= [$14,800 - ($88,600 × 0.08)]/12,217

Earnings per share Recession= ($14,800 - $7,088)/12,217

Earnings per share Recession=$7,712/12,217

Earnings per share Recession=0.63

Therefore what the earnings per share will be if the debt is issued and the economy is in a recession is 0.63