Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in ROE for economic expansion or recession, assuming no taxes. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32. b-1. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b-2. Calculate the percentage changes in ROE for economic expansion and recession after the recapitalization. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Dor
Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in ROE for economic expansion or recession, assuming no taxes. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32. b-1. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b-2. Calculate the percentage changes in ROE for economic expansion and recession after the recapitalization. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Dor
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Fujita, Incorporated, has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are
projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent
higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an interest
rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes
for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.
a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes.
Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.
a-2. Calculate the percentage changes in ROE for economic expansion or recession, assuming no taxes.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a
percent rounded to the nearest whole number, e.g., 32.
b-1. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a
percent rounded to 2 decimal places, e.g., 32.16.
b-2. Calculate the percentage changes in ROE for economic expansion and recession after the recapitalization.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a
percent rounded to 2 decimal places, e.g., 32.16.
a-1. Recession ROE
Normal ROE
Expansion ROE
a-2. Percentage change in recession ROE
Percentage change in expansion ROE
b-1. Recession ROE
Normal ROE
Expansion ROE
b-2. Percentage change in recession ROE
Percentage change in expansion ROE
c-1. Recession ROE
Normal ROE
Expansion ROE
Recession percentage change in ROE
Expansion percentage change in ROE
Assume the firm has a tax rate of 21 percent.
c-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the
percentage changes in ROE for economic expansion and recession.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a
percent rounded to 2 decimal places, e.g., 32.16.
c-2. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the
percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed
c-2. Recession ROE
Normal ROE
Expansion ROE
Recession percentage change in ROE
Expansion percentage change in ROE
%
%
%
recapitalization.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a
percent rounded to 2 decimal places, e.g., 32.16.
%
%
%
%
%
%
%
%
%
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