North Side,Inc

Multiple Choice

North Side,Inc.has no debt outstanding and a total market value of $175,000.Earnings before interest and taxes,EBIT,are projected to be $16,000 if economic conditions are normal.If there is strong expansion in the economy,then EBIT will be 30 percent higher.If there is a recession,then EBIT will be 70 percent lower.North Side is considering a $70,000 debt issue with a 7 percent interest rate.The proceeds will be used to repurchase shares of stock.There are currently 2,500 shares outstanding.North Side has a tax rate of 34 percent.If the economy expands strongly,EPS will change by ____ percent as compared to a normal economy,assuming that the firm recapitalizes.

A) 38.80 percent
B) 41.26 percent
C) 43.24 percent
D) 50.45 percent
E) 53.92 percent