Question

Ornaments, incorporated, is an all-equity firm with a total market value of $718,000 and 38,300 shares of stock outstanding. management believes the earnings before interest and taxes (ebit) will be $103,600 if the economy is normal. if there is a recession, ebit will be 25 percent lower, and if there is a boom, ebit will be 35 percent higher. the tax rate is 24 percent. what is the eps in a recession? multiple choice

O $2.03
O $1.62
O $1.54
O $2.19
O $1.05

Answer 1

The EPS in a recession for Ornaments, Incorporated is $1.54.

Step-by-step explanation:

To find the EPS (Earnings Per Share) in a recession for Ornaments, Incorporated, we need to calculate the earnings after taxes (EAT).

We start by finding the EBIT (Earnings Before Interest and Taxes) in a recession, which is 25% lower than the normal EBIT. From the given information, the normal EBIT is $103,600, so the recession EBIT is calculated as follows:

Recession EBIT = Normal EBIT - (Normal EBIT * 0.25) = $103,600 - ($103,600 * 0.25) = $77,700.

Next, we calculate the EAT, taking into account the tax rate of 24%:

EAT = Recession EBIT - (Recession EBIT * Tax Rate) = $77,700 - ($77,700 * 0.24) = $77,700 - $18,648 = $59,052.

Finally, we find the EPS by dividing the EAT by the number of shares outstanding:

EPS = EAT / Number of Shares = $59,052 / 38,300 = $1.54.

Therefore, the EPS in a recession for Ornaments, Incorporated is $1.54.