Kaelea, Inc., has no debt outstanding and a total market value of $165,000. Earnings before interest and taxes, EBIT, are projected to be $9,900 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $46,500 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,500 shares outstanding. Assume the company has a market-to-book ratio of 1.0.
a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
ROE
Recession
%
Normal
%
Expansion
%
b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (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.)
%ΔROE
Recession
%
Expansion
%
Assume the firm goes through with the proposed recapitalization and no taxes.
c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
ROE
Recession
%
Normal
%
Expansion
%
d. Calculate the percentage changes in ROE for economic expansion and recession. (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.)
%ΔROE
Recession
%
Expansion
%
Assume the firm has a tax rate of 40 percent.
e. 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. (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.)
ROE
Recession
%
Normal
%
Expansion
%
%ΔROE
Recession
%
Expansion
%
f. 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 recapitalization. (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.)
ROE
Recession
%
Normal
%
Expansion
%
%ΔROE
Recession
%
Expansion
%
Kaelea, Inc., has no debt outstanding and a total market value of $165,000. Earnings before interest and taxes, EBIT, are projected to be $9,900 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $46,500 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,500 shares outstanding. Assume the company has a market-to-book ratio of 1.0.
a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (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.)
| %ΔROE | |
| Recession | % |
| Expansion | % |
Assume the firm goes through with the proposed recapitalization and no taxes.
c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
d. Calculate the percentage changes in ROE for economic expansion and recession. (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.)
| %ΔROE | |
| Recession | % |
| Expansion | % |
|
|
|
Assume the firm has a tax rate of 40 percent.
e. 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. (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.)
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
| %ΔROE | |
| Recession | % |
| Expansion | % |
f. 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 recapitalization. (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.)
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
| %ΔROE | |
| Recession | % |
| Expansion | % |
Related questions
| aelea, Inc., has no debt outstanding and a total market value of $129,000. Earnings before interest and taxes, EBIT, are projected to be $8,700 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $42,900 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,300 shares outstanding. Assume Kaelea has a market-to-book ratio of 1.0. |
| Requirement 1: |
| (a) | Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) |
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
| (b) | Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) |
| %?ROE | |
| Recession | % |
| Expansion | % |
| Requirement 2: |
| Assume the firm goes through with the proposed recapitalization and no taxes. |
| (a) | Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
| (b) | Calculate the percentage changes in ROE for economic expansion and recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| %?ROE | |
| Recession | % |
| Expansion | % |
| Requirement 3: |
| Assume the firm has a tax rate of 40 percent. |
| (a) | 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. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
| %?ROE | |
| Recession | % |
| Expansion | % |
| (b) | 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 recapitalization. (Do not round intermediate calculations Negative amounts should be indicated by a minus sign. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| ROE | |
| Recession | % |
| Normal | % |
| Expansion | % |
| %?ROE | |
| Recession | % |
| Expansion | % |
