Kaelea, Inc., has no debt outstanding and a total market value of $69,000. Earnings before interest...

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Finance

Kaelea, Inc., has no debt outstanding and a total market valueof $69,000. Earnings before interest and taxes, EBIT, are projectedto be $9,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 20 percent higher. Ifthere is a recession, then EBIT will be 25 percent lower. Thecompany is considering a $21,900 debt issue with an interest rateof 8 percent. The proceeds will be used to repurchase shares ofstock. There are currently 4,600 shares outstanding. Assume thecompany has a market-to-book ratio of 1.0.

a. Calculate return on equity, ROE, under each ofthe three economic scenarios before any debt is issued, assuming notaxes. (Do not round intermediate calculations and enteryour answers as a percent rounded to 2 decimal places, e.g.,32.16.)

ROE
Recession %
Normal %
Expansion %

b. Calculate the percentage changes in ROE whenthe economy expands or enters a recession, assuming no taxes.(A negative answer should be indicated by a minussign. Do not round intermediate calculations and enter youranswers as a percent rounded to the nearest whole number, e.g.,32.)

%?ROE
Recession %
Expansion %

Assume the firm goes through with the proposed recapitalization andno taxes.

c. Calculate return on equity, ROE, under each ofthe three economic scenarios after the recapitalization.(Do not round intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g.,32.16.)

ROE
Recession %
Normal %
Expansion %

d. Calculate the percentage changes in ROE foreconomic expansion and recession. (A negative answer shouldbe indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g.,32.16.)

%?ROE
Recession %
Expansion %

Assume the firm has a tax rate of 35 percent.

e. Calculate return on equity, ROE, under each ofthe three economic scenarios before any debt is issued. Also,calculate the percentage changes in ROE for economic expansion andrecession. (A negative answer should be indicated by aminus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)

ROE
Recession %
Normal %
Expansion %
%?ROE
Recession %
Expansion %

f. Calculate return on equity, ROE, under each ofthe three economic scenarios after the recapitalization. Also,calculate the percentage changes in ROE for economic expansion andrecession, assuming the firm goes through with the proposedrecapitalization. (A negative answer should be indicated bya minus sign. Do not round intermediatecalculations and enter your answers as a percent rounded to 2decimal places, e.g.,32.16.)

ROE
Recession %
Normal %
Expansion %

%?ROE
Recession %
Expansion %

Answer & Explanation Solved by verified expert

4.0 Ratings (440 Votes)

a ROE EBIT1tax rateMarket value Recession ROE EBIT1recession impact1tax ratemarket value ROE900010251069000 ROE978 Normal ROE EBIT1tax rateMarket value ROE90001069000 ROE1304 Expansion ROE EBIT1Growth impact1tax rateMarket value ROE90001021069000 ROE1565 b age change in ROE for Recession ROE recessionROE normal1100 00978013041100 25 age change in ROE for Growth ROE GrowthROE See Answer

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Kaelea, Inc., has no debt outstanding and a total market valueof $69,000. Earnings before interest and taxes, EBIT, are projectedto be $9,000 if economic conditions are normal. If there is strongexpansion in the economy, then EBIT will be 20 percent higher. Ifthere is a recession, then EBIT will be 25 percent lower. Thecompany is considering a $21,900 debt issue with an interest rateof 8 percent. The proceeds will be used to repurchase shares ofstock. There are currently 4,600 shares outstanding. Assume thecompany has a market-to-book ratio of 1.0.a. Calculate return on equity, ROE, under each ofthe three economic scenarios before any debt is issued, assuming notaxes. (Do not round intermediate calculations and enteryour answers as a percent rounded to 2 decimal places, e.g.,32.16.)ROERecession%Normal%Expansion%b. Calculate the percentage changes in ROE whenthe economy expands or enters a recession, assuming no taxes.(A negative answer should be indicated by a minussign. Do not round intermediate calculations and enter youranswers as a percent rounded to the nearest whole number, e.g.,32.)%?ROERecession%Expansion% Assume the firm goes through with the proposed recapitalization andno taxes.c. Calculate return on equity, ROE, under each ofthe three economic scenarios after the recapitalization.(Do not round intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g.,32.16.)ROERecession%Normal%Expansion%d. Calculate the percentage changes in ROE foreconomic expansion and recession. (A negative answer shouldbe indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percentrounded to 2 decimal places, e.g.,32.16.)%?ROERecession%Expansion%Assume the firm has a tax rate of 35 percent.e. Calculate return on equity, ROE, under each ofthe three economic scenarios before any debt is issued. Also,calculate the percentage changes in ROE for economic expansion andrecession. (A negative answer should be indicated by aminus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)ROERecession%Normal%Expansion%%?ROERecession%Expansion%f. Calculate return on equity, ROE, under each ofthe three economic scenarios after the recapitalization. Also,calculate the percentage changes in ROE for economic expansion andrecession, assuming the firm goes through with the proposedrecapitalization. (A negative answer should be indicated bya minus sign. Do not round intermediatecalculations and enter your answers as a percent rounded to 2decimal places, e.g.,32.16.)ROERecession%Normal%Expansion%%?ROERecession%Expansion%