Control Inc., has no debt outstanding and a total market value of $100,000. EBIT is projected...

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Control Inc., has no debt outstanding and a total market valueof $100,000. EBIT is projected to be $6,000 if economic conditionsare normal. If there is a strong expansion in the economy, thenEBIT will be 30% higher. If there is a recession, then EBIT will be60% lower. The firm is considering a $40,000 debt issue with 5%interest rate. The proceeds will be used to repurchase shares ofstock. There are currently 2,500 shares outstanding. Ignore taxesfor this problem.
Suppose the firm in problem 1 has a market-to-book ratio of 1(i.e., MV= TE= $100,000).
a- Calculate ROE under each of the three economic scenariosbefore any debt is issued. Also calculate the percentage changes inROE for economic expansion and recession, assuming no taxes. (2.4%;6%; 7.8%; -60%; 30%)
b- Repeat part (a) assuming the firm goes through with theproposed capitalization. (0.67%; 6.67%; 9.67%; -90%, 45%) c- Repeatparts (a) and (b) of this problem assuming the firm has a tax rateof 35%. (No debt: 1.56%; 3.9%; 5.07%; -60%, 30%; with debt: 0.43%;4.33%; 6.28%; -90%, 45%)
no excel, please show formulas. I will rate

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4.1 Ratings (736 Votes)

1 Without proposed restructuring Economic condition Normal strong expansion recession EBIT 6000 600013 7800 6000106 2400 less interest 0 0 0 before tax profit 6000 7800 2400 less tax0 0 0 0 after tax profit 6000 7800 2400 no of shares 2500 2500 2500 EPS after tax profitno of shares 60002500 24 78002500 312 24002500 096 change in EPS EPS in expansion or recession EPS in normalEPS in nornal 3122424 3000 0962424 60 2 With proposed capital See Answer

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Transcribed Image Text

Control Inc., has no debt outstanding and a total market valueof $100,000. EBIT is projected to be $6,000 if economic conditionsare normal. If there is a strong expansion in the economy, thenEBIT will be 30% higher. If there is a recession, then EBIT will be60% lower. The firm is considering a $40,000 debt issue with 5%interest rate. The proceeds will be used to repurchase shares ofstock. There are currently 2,500 shares outstanding. Ignore taxesfor this problem.Suppose the firm in problem 1 has a market-to-book ratio of 1(i.e., MV= TE= $100,000).a- Calculate ROE under each of the three economic scenariosbefore any debt is issued. Also calculate the percentage changes inROE for economic expansion and recession, assuming no taxes. (2.4%;6%; 7.8%; -60%; 30%)b- Repeat part (a) assuming the firm goes through with theproposed capitalization. (0.67%; 6.67%; 9.67%; -90%, 45%) c- Repeatparts (a) and (b) of this problem assuming the firm has a tax rateof 35%. (No debt: 1.56%; 3.9%; 5.07%; -60%, 30%; with debt: 0.43%;4.33%; 6.28%; -90%, 45%)no excel, please show formulas. I will rate