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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
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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## Financial Analysis of Fujita, Incorporated **Overview:** Fujita, Incorporated, is evaluating the impact of different economic scenarios on its financial performance. The company has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes (EBIT) are projected at $18,000 under normal economic conditions. Strong economic growth could increase EBIT by 25%, while a recession could decrease it by 30%. Fujita is considering issuing $60,000 in debt with a 7% interest rate to repurchase shares. Currently, there are 7,400 shares outstanding. The calculations ignore taxes unless specified otherwise, and assume a market-to-book ratio of 1.0 with constant stock price. --- ### Tasks and Tables: **a-1. Return on Equity (ROE) Before Debt Issuance:** - Calculate ROE for three scenarios: recession, normal, and expansion. - Do not round intermediate calculations. Enter percentages with two decimal places. **a-2. Percentage Change in ROE Without Taxes:** - Calculate percentage change in ROE for economic expansion and recession scenarios. - Negative changes should be indicated by a minus sign. **Table a-1 and a-2:** | Recession ROE | Normal ROE | Expansion ROE | % Change Recession | % Change Expansion | |---------------|------------|---------------|--------------------|---------------------| | % | % | % | % | % | --- **b-1. ROE After Recapitalization:** - Recalculate ROE for recession, normal, and expansion scenarios after debt issuance. - Follow the same rounding and sign rules as above. **b-2. Percentage Change in ROE With Recapitalization:** - Calculate the percentage change in ROE post-recapitalization during expansion and recession. **Table b-1 and b-2:** | Recession ROE | Normal ROE | Expansion ROE | % Change Recession | % Change Expansion | |---------------|------------|---------------|--------------------|---------------------| | % | % | % | % | % | --- **Assuming a Tax Rate of 21%:** **c-1. ROE Before Debt and with Taxes:** - Calculate ROE for each economic scenario considering the 21% tax rate. - Include percentage changes for expansion and recession. **c-2.
Transcribed Image Text:## Financial Analysis of Fujita, Incorporated **Overview:** Fujita, Incorporated, is evaluating the impact of different economic scenarios on its financial performance. The company has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes (EBIT) are projected at $18,000 under normal economic conditions. Strong economic growth could increase EBIT by 25%, while a recession could decrease it by 30%. Fujita is considering issuing $60,000 in debt with a 7% interest rate to repurchase shares. Currently, there are 7,400 shares outstanding. The calculations ignore taxes unless specified otherwise, and assume a market-to-book ratio of 1.0 with constant stock price. --- ### Tasks and Tables: **a-1. Return on Equity (ROE) Before Debt Issuance:** - Calculate ROE for three scenarios: recession, normal, and expansion. - Do not round intermediate calculations. Enter percentages with two decimal places. **a-2. Percentage Change in ROE Without Taxes:** - Calculate percentage change in ROE for economic expansion and recession scenarios. - Negative changes should be indicated by a minus sign. **Table a-1 and a-2:** | Recession ROE | Normal ROE | Expansion ROE | % Change Recession | % Change Expansion | |---------------|------------|---------------|--------------------|---------------------| | % | % | % | % | % | --- **b-1. ROE After Recapitalization:** - Recalculate ROE for recession, normal, and expansion scenarios after debt issuance. - Follow the same rounding and sign rules as above. **b-2. Percentage Change in ROE With Recapitalization:** - Calculate the percentage change in ROE post-recapitalization during expansion and recession. **Table b-1 and b-2:** | Recession ROE | Normal ROE | Expansion ROE | % Change Recession | % Change Expansion | |---------------|------------|---------------|--------------------|---------------------| | % | % | % | % | % | --- **Assuming a Tax Rate of 21%:** **c-1. ROE Before Debt and with Taxes:** - Calculate ROE for each economic scenario considering the 21% tax rate. - Include percentage changes for expansion and recession. **c-2.
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