RAK, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $105,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.
a1- Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
a2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
Assume the firm goes through with the proposed recapitalization.
b1- Calculate the return on equity (ROE) under each of the three economic scenarios.
b2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
Assume the firm has a tax rate of 35 percent.
c1- Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
c2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
c3- Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
c4- Given the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
RAK, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $105,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.
a1- Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
a2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
Assume the firm goes through with the proposed recapitalization.
b1- Calculate the return on equity (ROE) under each of the three economic scenarios.
b2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
Assume the firm has a tax rate of 35 percent.
c1- Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
c2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
c3- Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
c4- Given the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
Related questions
| RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $140,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 12,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.
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| RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $95,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0. |
| a-1 | Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
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