Question

Northern Wood Products is an all-equity firm with 17,100 shares of stock outstanding and a total market value of $356,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $28,000 if the economy is normal, $15,600 if the economy is in a recession, and $40,400 if the economy booms. Ignore taxes. Management is considering issuing $89,200 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?

Answer 1

Answer:

Northern Wood Products

The earnings per share if the debt is issue under economic recession will be $0.60.

Explanation:

Earnings before interest and taxes under recession = $15,600

Interest on debt issue ($89,200 * 6%)  =                         $5,352

Taxes (ignored)

Earnings after interest and taxes =                                 $10,248

Earnings per share (EPS) = After-Tax Earnings divided by number of outstanding common shares

= $10,248/17,100

= $0.599

= $0.60