Ghost, Inc., has no debt outstanding and a total market value of $369,600. Earnings before interest...

80.2K

Verified Solution

Question

Finance

Ghost, Inc., has no debt outstanding and a total market value of$369,600. Earnings before interest and taxes, EBIT, are projectedto be $51,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 15 percent higher. Ifthere is a recession, then EBIT will be 24 percent lower. Thecompany is considering a $185,000 debt issue with an interest rateof 6 percent. The proceeds will be used to repurchase shares ofstock. There are currently 8,400 shares outstanding. Ignore taxesfor questions a and b. Assume the company has a market-to-bookratio of 1.0 and the stock price remains constant.
a1.
Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued.
a2. Calculate the percentage changes in ROE when the economyexpands or enters a recession.
b1. Assume the firm goes through with the proposedrecapitalization. Calculate the return on equity (ROE) under eachof the three economic scenarios.
b2. Assume the firm goes through with the proposedrecapitalization. Calculate the percentage changes in ROE when theeconomy expands or enters a recession.
Assume the firm has a tax rate of 24 percent.
c-1. Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)
c-2. Calculate the percentage changes in ROE when the economyexpands or enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)
c-3. Calculate the return on equity (ROE) under each of the threeeconomic scenarios assuming the firm goes through with therecapitalization. (Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)
c-4. Given the recapitalization, calculate the percentage changes inROE when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)

Answer & Explanation Solved by verified expert

4.0 Ratings (707 Votes)

Since the question has multiple subparts I have answered the first four Part a1 The return on equity ROE under each of the three economic scenarios before any debt is issued is determined as below ROE Recession Net Income under RecessionEquity100 51000 5100024369600100 1049 ROE Normal Net Income under NormalEquity100 51000369600100 1380 ROE Expansion Net Income under ExpansionEquity100 51000 5100015369600100 1587 Tabular Representation ROE See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Ghost, Inc., has no debt outstanding and a total market value of$369,600. Earnings before interest and taxes, EBIT, are projectedto be $51,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 15 percent higher. Ifthere is a recession, then EBIT will be 24 percent lower. Thecompany is considering a $185,000 debt issue with an interest rateof 6 percent. The proceeds will be used to repurchase shares ofstock. There are currently 8,400 shares outstanding. Ignore taxesfor questions a and b. Assume the company has a market-to-bookratio of 1.0 and the stock price remains constant.a1.Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued.a2.Calculate the percentage changes in ROE when the economyexpands or enters a recession.b1.Assume the firm goes through with the proposedrecapitalization. Calculate the return on equity (ROE) under eachof the three economic scenarios.b2.Assume the firm goes through with the proposedrecapitalization. Calculate the percentage changes in ROE when theeconomy expands or enters a recession.Assume the firm has a tax rate of 24 percent.c-1.Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)c-2.Calculate the percentage changes in ROE when the economyexpands or enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)c-3.Calculate the return on equity (ROE) under each of the threeeconomic scenarios assuming the firm goes through with therecapitalization. (Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)c-4.Given the recapitalization, calculate the percentage changes inROE when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)

c-1.	Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)
c-2.	Calculate the percentage changes in ROE when the economyexpands or enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)
c-3.	Calculate the return on equity (ROE) under each of the threeeconomic scenarios assuming the firm goes through with therecapitalization. (Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)
c-4.	Given the recapitalization, calculate the percentage changes inROE when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.)

a1.	Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued.
a2.	Calculate the percentage changes in ROE when the economyexpands or enters a recession.
b1.	Assume the firm goes through with the proposedrecapitalization. Calculate the return on equity (ROE) under eachof the three economic scenarios.
b2.	Assume the firm goes through with the proposedrecapitalization. Calculate the percentage changes in ROE when theeconomy expands or enters a recession.