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20 December, 00:53

Ornaments, Inc., is an all-equity firm with a total market value of $531,000 and 19,600 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $74,700 if the economy is normal. If there is a recession, EBIT will be 15 percent lower, and if there is a boom, EBIT will be 25 percent higher. The tax rate is 34 percent. What is the EPS in a recession

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  1. 20 December, 00:56
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    The EPS in recession is 2.14 $/share.

    Explanation:

    If there is a recession, EBIT will be 15% lower than $74,700.

    That means an EBIT of $74,700 * (1-0.15) = $63,495.

    The net income that will be paid in dividends is

    Net income = EBIT * (1-tax rate) = $ 63,495 * (1-0.34) = $ 41,906.7

    If there are 19,600 shares of stock outstanding and no preferred dividends, the EPS can be calculated as

    EPS = (Net dividend pay / common shares) = 41,906.7 / 19,600

    EPS = 2.14 $/share.
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