Christmas Ornaments,Inc

Multiple Choice

Christmas Ornaments,Inc.is an all-equity firm with a total market value of $386,000 and 15,000 shares of stock outstanding.Management is considering issuing $75,000 of debt at an interest rate of 8 percent and using the proceeds on a stock repurchase.As an all-equity firm,management believes the earnings before interest and taxes (EBIT) will be $31,000 if the economy is normal,$12,000 if it is in a recession,and $37,000 if the economy booms.Ignore taxes.What will the EPS be if the economy falls into a recession and the firm maintains its all-equity status?

A) $0.78
B) $0.80
C) $1.21
D) $1.67
E) $2.07