Ornaments, Inc.,is an all-equity firm with a total market value of $520,000 and 18,500 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $73,000 if the economy is normal. If there is a recession, EBIT will be 10% lower, and if there is a boom, EBIT will be 20% higher. The tax rate is 40%. What is the EPS in a recession?

Ornaments, Inc.

In a recession, the EPS is $2.13 per share.

Explanation:

a) Data and Calculations:

                       Normal      Recession                     Boom

EBIT               $73,000      $65,700 (10% lower)  $87,600 (20% higher)

Taxes (40%)   29,200         26,280                        35,040

Net income  $43,800       $39,420                      $52,560

EPS =             $2.37           $2.13                             $2.84

= Net Income/18,500 or (EBIT -(1 - 40%))/Outstanding shares

EPS = Earnings per share.  It is computed by dividing the net income by the number of outstanding shares.  It indicates how much dollars Ornaments, Inc. makes for each share held by a common stockholder.

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