James Inc., has no debt outstanding and a total market value of $395,600. Earnings before interest...

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James Inc., has no debt outstanding and a total market value of$395,600. Earnings before interest and taxes, EBIT, are projectedto be $53,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 13 percent higher. Ifthere is a recession, then EBIT will be 22 percent lower. Thecompany is considering a $195,000 debt issue with an interest rateof 8 percent. The proceeds will be used to repurchase shares ofstock. There are currently 8,600 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.

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.)

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3.6 Ratings (356 Votes)

Market to book ratio 1 so equity 395600 ROE Net incomeequity EBIT in expansion normal EBIT113 EBIT in recession normal EBIT122 c1 State EBIT Equity ROE Expansion 59890 395600 1514 Normal 53000 395600 1340 See Answer

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James Inc., has no debt outstanding and a total market value of$395,600. Earnings before interest and taxes, EBIT, are projectedto be $53,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 13 percent higher. Ifthere is a recession, then EBIT will be 22 percent lower. Thecompany is considering a $195,000 debt issue with an interest rateof 8 percent. The proceeds will be used to repurchase shares ofstock. There are currently 8,600 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. 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.)