Calculate return on equity (ROE) under each of the three economic

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
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Fujita, Incorporated, has no debt outstanding and a total market value of
$422,400. Earnings before interest and taxes, EBIT, are projected to be
$55,000 if economic conditions are normal. If there is strong expansion in the
economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT
will be 20 percent lower. The company is considering a $205,000 debt issue
with an interest rate of 6 percent. The proceeds will be used to repurchase
shares of stock. There are currently 8,800 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. (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. (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. (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. (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
a-1. Normal ROE
a-1. Expansion ROE
a-2. Recession percentage change in
ROE
a-2. Expansion percentage change in
ROE
b-1. Recession ROE
b-1. Normal ROE
b-1. Expansion ROE
b-2. Recession percentage change in
ROE
%
%
%
%
%
%
%
%
%
b-2. Expansion percentage change in
ROE
Assume the firm has a tax rate of 23 percent.
c-1. Calculate return on equity (ROE) under each of the three economic
scenarios before any debt is issued. (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. (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. (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. (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.,
22161
%
Transcribed Image Text:Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. Earnings before interest and taxes, EBIT, are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 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. (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. (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. (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. (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 a-1. Normal ROE a-1. Expansion ROE a-2. Recession percentage change in ROE a-2. Expansion percentage change in ROE b-1. Recession ROE b-1. Normal ROE b-1. Expansion ROE b-2. Recession percentage change in ROE % % % % % % % % % b-2. Expansion percentage change in ROE Assume the firm has a tax rate of 23 percent. c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (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. (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. (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. (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., 22161 %
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