Northern Wood Products is an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000.Based on its current capital structure,the firm is expected to have earnings before interest and taxes of $26,000 if the economy is normal,$3,000 if the economy is in a recession,and $33,000 if the economy booms.Ignore taxes.Management is considering issuing $88,000 of debt with a 6 percent coupon rate.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?

Question

Quizplus · Accepted Answer

Shares repurchased $88,000/($352,000/16,000) = 4,000 sharesShares outstanding = 16,000 - 4,000 = 12,000 sharesEPS_Recession = [$3,000 - ($88,000 × 0.06)]/12,000 = -$0.19

Northern Wood Products Is an All-Equity Firm with 16,000 Shares