a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. 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 when the economy expands or enters a 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. b-1. Assume the firm goes through with the proposed recapitalization. Calculate the return on equity, ROE, under each of the three economic scenarios. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b-2. Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a 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.
a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. 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 when the economy expands or enters a 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. b-1. Assume the firm goes through with the proposed recapitalization. Calculate the return on equity, ROE, under each of the three economic scenarios. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b-2. Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a 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.
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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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Transcribed Image Text: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.
Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.
c-2. Calculate the percentage changes in ROE when the economy expands or enters a 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-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the
recapitalization.
Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.
c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a 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-1. Recession ROE
Normal ROE
Expansion ROE
c-2. Recession percentage change in ROE
Expansion percentage change in ROE
c-3. Recession ROE
Normal ROE
Expansion ROE
c-4. Recession percentage change in ROE
Expansion percentage change in ROE
%
%
%
%
%
%
%
%
%
%
Transcribed Image Text:Fujita, Incorporated, has no debt outstanding and a total market value of $332,100. Earnings before interest and taxes, EBIT, are
projected to be $48,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent
higher. If there is a recession, then EBIT will be 29 percent lower. The company is considering a $170,000 debt issue with an interest
rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,100 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.
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 when the economy expands or enters a 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.
b-1. Assume the firm goes through with the proposed recapitalization. Calculate the return on equity, ROE, under each of the three
economic scenarios.
Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.
b-2. Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy
expands or enters a 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.
Answer is complete but not entirely correct.
a-1. Recession ROE
Normal ROE
Expansion ROE
a-2. Recession percentage change in ROE
Expansion percentage change in ROE
b-1. Recession ROE
Normal ROE
Expansion ROE
8.11%
11.42 X %
13.47 %
-29.00
%
18.00
%
10.81 %
17.59 X %
21.80 X %
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