Question

Control Inc. has no debt and a total market value of $100,000. EBIT are projected to be 6,000 if economic conditions are normal. If there is an expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 60% lower. Control Inc. is considering a $40,000 debt issue with a 5% interest rate. The proceeds will be used to repurchase shares of stock. Currently there are 2500 shares outstanding. Ignore taxes.

1. Calculate earning per share for the case of strong expansion period before any debt is issued:

3.12

3.95

4.82

5.18

6.02

Answer 1

The earnings per share (EPS) for Control Inc. during a strong economic expansion before any debt is issued would be 3.12.

Step-by-step explanation:

To calculate the earnings per share (EPS) for Control Inc. during a strong expansion period before any debt is issued, we start by determining the expected Earnings Before Interest and Taxes (EBIT) during this expansion.

The EBIT is projected to increase by 30% from the normal condition, which would be 6,000 x 1.30 = 7,800.

Since there is no debt, we don't need to account for interest, so the entire EBIT is available to shareholders.

Next, we divide the EBIT by the number of outstanding shares to find the EPS. With an EBIT of 7,800 and 2,500 shares outstanding, the EPS would be 7,800 / 2,500 = 3.12.

Answer 2

$3.12

Step-by-step explanation:

For expansion:

EBT = EBIT - Interest

= [6,000 + (30% × 6,000)] - $0

= $7,800

Net income = EBT - Tax

= $7,800 - $0

= $7,800

Earning per share for the case of strong expansion period before any debt is issued:

= Net income ÷ Number of shares outstanding

= $7,800 ÷ 2,500

= $3.12