Omnipotent, LLC Is an All-Equity Firm with 75,000 Shares of Stock

question 53

Multiple Choice

Omnipotent, LLC is an all-equity firm with 75,000 shares of stock outstanding and a total market value of $984,000.Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $226,560 if the economy is normal, $64,000 if the economy is in a recession, and $356,000 if the economy booms.Ignore taxes.Management is considering issuing $165,000 of debt at a coupon rate of 7.5 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? (Round the number of shares repurchased down to the nearest whole share.)

• A)$0.16
• B)$0.83
• C)$0.55
• D)$0.07
• E)$0.03

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Definitions:

Service

A non-tangible good provided to consumers or businesses, such as consulting, banking, or cleaning, which can't be stored or physically possessed.

Fee

A charge for services provided or the right to participate in an activity or access certain benefits.

Unearned Rent Revenue

Liability account that reflects payments received for rent before the rental period has occurred; it is recognized as revenue over time as the service is provided.

Rent Expense

The cost incurred by a business to utilize property as an office, manufacturing space, storage, or retail location.