Transcribed Image Text
RAK, Inc., has no debt outstanding and a total market value of$250,000. Earnings before interest and taxes, EBIT, are projectedto be $40,000 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 20 percent lower. RAK isconsidering a $105,000 debt issue with an interest rate of 4percent. The proceeds will be used to repurchase shares of stock.There are currently 10,000 shares outstanding. Ignore taxes forquestions a and b. Assume the company has a market-to-book ratio of1.0.a-1 Calculate 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.)ROERecession %Normal %Expansion %a-2 Calculate the percentage changes in ROE when the economyexpands or 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 ROERecession %Expansion %Assume the firm goes through with the proposedrecapitalization.b-1 Calculate the return on equity (ROE) under each of the threeeconomic scenarios. (Do not round intermediate calculations. Enteryour answers as a percent rounded to 2 decimal places, e.g.,32.16.)ROERecession %Normal %Expansion %b-2 Calculate the percentage changes in ROE when the economyexpands or 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 ROERecession %Expansion %Assume the firm has a tax rate of 35 percent.c-1 Calculate 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.)ROERecession %Normal %Expansion %c-2 Calculate the percentage changes in ROE when the economyexpands or 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 ROERecession %Expansion %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 calculations. Enteryour answers as a percent rounded to 2 decimal places, e.g.,32.16.)ROERecession %Normal %Expansion %c-4 Given the recapitalization, calculate the percentage changesin ROE when the economy expands or enters a recession. (Negativeamounts should be indicated by a minus sign. Round your answers to2 decimal places. (e.g., 32.16))% change in ROERecession %Expansion %
Other questions asked by students
You own a lot in Savannah, Georgia that is currently unused. Similar lots have recently sold...
Prove the Weierstrass M-test for uniform convergence of Series of Functions.
You find an old bottle of aspirin whose shelf life is expired. Assuming you have a...
A long solenoid of radius 10cm is surrounding coaxially by a larger coil of radius...
In a recent poll of 350 likely voters, 42% of them preferred the incumbent candidate....
Rank the following bonds in order from lowest credit risk to highest risk all with...
Question 8 A is often used to illustrate the position of a firm's products or...