Question

Ornaments, Inc., is an all-equity firm with a total market value of $564,000 and 22,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $79,800 if the economy is normal. If there is a recession, EBIT will be 30 percent lower, and if there is a boom, EBIT will be 40 percent higher. The tax rate is 34 percent. What is the EPS in a recession?

Answer 1

To calculate the EPS in a recession, multiply the EBIT by (1 - tax rate) and divide the result by the number of shares outstanding.

Step-by-step explanation:

To calculate the EPS in a recession, we need to find the earnings after tax (EAT). We start by calculating the EBIT in a recession, which is $79,800 x 0.7 (30% lower than normal) = $55,860. Then, we calculate the EAT by multiplying the EBIT by (1 - tax rate), which is $55,860 x (1 - 0.34) = $36,876. Finally, we calculate the EPS by dividing the EAT by the number of shares outstanding, which is $36,876 ÷ 22,900 = $1.61 per share.