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-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%
Other questions asked by students
What is the transformation that takes ASTU to AS T U 5 th Rotation 90...
Question 5 Points 3 Which ordered pair indicates the location of Linda s house TY...
Determine if the relation is a function and justify your answer Then identify all key...
1 Find the domain of the given logarithmic function f x log 3 X 2...
Evaluate the following expression 7 5 4 7 5 4 2 Simplify your answer
Pinky Corp. acquired 90% of the outstanding stock of Snowball Inc on November 1, 2017....
A bond issued for eight years at a market interest rate of 8%. If compounding...
the management of Weimar inc a civil engineering design company is considering an investment in...