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% lower, and if there is a boom, EBIT will be 20% higher. The tax rate is 40%. What is the EPS in a recession?

Answer 1

Ornaments, Inc.

In a recession, the EPS is $2.13 per share.

Step-by-step explanation:

a) Data and Calculations:

Normal Recession Boom

EBIT $73,000 $65,700 (10% lower) $87,600 (20% higher)

Taxes (40%) 29,200 26,280 35,040

Net income $43,800 $39,420 $52,560

EPS = $2.37 $2.13 $2.84

= Net Income/18,500 or (EBIT -(1 - 40%))/Outstanding shares

EPS = Earnings per share. It is computed by dividing the net income by the number of outstanding shares. It indicates how much dollars Ornaments, Inc. makes for each share held by a common stockholder.