Question

Ornaments, Inc., is an all-equity firm with a total market value of $542,000 and 20,700 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $76,400 if the economy is normal. If there is a recession, EBIT will be 20 percent lower, and if there is a boom, EBIT will be 30 percent higher. The tax rate is 35 percent. What is the EPS in a recession

Answer 1

Answer: $1.92

Step-by-step explanation:

First we would need to calculate the EBIT in a Recession.

Question says that EBIT in a Recession is 20% lower than normal.

Calculating therefore we have,

= 76,400 * ( 1 - 0.2)

= 76,400 (0.8)

= $61,120

EBIT in a Recession is $61,120.

Now we have to account for taxes assuming no interest payments.

Taxes are 35%.

= 61,120 ( 1 - 0.35)

= $39,728

This is the after tax earnings in a Recession.

Earnings Per Share (EPS) is simply Earnings divided by No. of shares

= $39,728/20,700

= $1.92

The EPS in a recession is $1.92