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RAK, Inc., has no debt outstanding and a total market value of$240,000. Earnings before interest and taxes, EBIT, are projectedto be $36,000 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. RAK isconsidering a $155,000 debt issue with an interest rate of 6percent. The proceeds will be used to repurchase shares of stock.There are currently 6,000 shares outstanding. Ignore taxes forquestions a and b. Assume the company has a market-to-book ratio of1.0. a-1Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations. Enter your answers as a percent roundedto 2 decimal places, e.g., 32.16.) ROE Recession% Normal% Expansion% a-2Calculate the percentage changes in ROE when the economy expandsor enters a recession. (Negative amounts should beindicated by a minus sign. Do not round intermediate calculations.Enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.) % change in ROE Recession% Expansion% Assume the firm goes through with the proposedrecapitalization.b-1Calculate the return on equity (ROE) under each of the threeeconomic scenarios. (Do not round intermediatecalculations. Enter your answers as a percent rounded to 2 decimalplaces, e.g., 32.16.) ROE Recession% Normal% Expansion% b-2Calculate the percentage changes in ROE when the economy expandsor enters a recession. (Negative amounts should beindicated by a minus sign. Do not round intermediate calculations.Enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.) % change in ROE Recession% Expansion% Assume the firm has a tax rate of 35 percent. c-1Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued. (Do not roundintermediate calculations. Enter your answers as a percent roundedto 2 decimal places, e.g., 32.16.) ROE Recession% Normal% Expansion% c-2Calculate the percentage changes in ROE when the economy expandsor enters a recession. (Negative amounts should beindicated by a minus sign. Do not round intermediate calculations.Enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.) % change in ROE Recession% Expansion% c-3Calculate the return on equity (ROE) under each of the threeeconomic scenarios assuming the firm goes through with therecapitalization. (Do not round intermediate calculations.Enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.) ROE Recession% Normal% Expansion% c-4Given the recapitalization, calculate the percentage changes inROE when the economy expands or enters a recession.(Negative amounts should be indicated by a minus sign.Round your answers to 2 decimal places. (e.g., 32.16)) % change in ROE Recession% Expansion%
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