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Studer In Class Exercise Wednesday, June 10, 2020 6-10-20B Precise Electronics Inc. has projected EBIT to be $225,000 for next year. Their tax rate is 21% and there is $500,000 in equity. Precise Electronics Inc has no debt currently, but the board is considering a loan of $150,000 at 8% interest, which they will use to repurchase shares of their own stock at $50 per share. If there is a recession, EBIT could be only 75% of projected. If there is an expansion, EBIT might be 40% greater than projected. What will their return on equity be under the current structure and under the proposed structure for each scenario? Is the restructuring a good idea? Current Structure: Worst Case Base Case Best Case Proposed Structure: Worst Case Base Case Best Case Should they do the restructuring? Yes or no Studer In Class Exercise Wednesday, June 10, 2020 6-10-20B Precise Electronics Inc. has projected EBIT to be $225,000 for next year. Their tax rate is 21% and there is $500,000 in equity. Precise Electronics Inc has no debt currently, but the board is considering a loan of $150,000 at 8% interest, which they will use to repurchase shares of their own stock at $50 per share. If there is a recession, EBIT could be only 75% of projected. If there is an expansion, EBIT might be 40% greater than projected. What will their return on equity be under the current structure and under the proposed structure for each scenario? Is the restructuring a good idea? Current Structure: Worst Case Base Case Best Case Proposed Structure: Worst Case Base Case Best Case Should they do the restructuring? Yes or no

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