Question

Ornaments, Inc.,is an all-equity firm with a total market value of $520,000 and 18,500 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $73,000 if the economy is normal. If there is a recession, EBIT will be 10 percent lower, and if there is a boom, EBIT will be 20 percent higher. The tax rate is 40 percent. What is the EPS in a recession?

Answer 1

2.1308

Step-by-step explanation:

EPS recession = (EBIT normal * (1 - Reduction in recession) * (1 - Tax rate)/shares

EPS recession = ($73,000 * (1 - 0.1)) * (1 - 0.40)/18,500

EPS recession = $65,700 * 0.6 / 18,500

EPS recession = 2.130810810810811

EPS recession = 2.1308