Fujita, Incorporated, has no debt outstanding and a total market value of $308,100. Earnings before interest and taxes, EBIT, are projected to be $46,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $160,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,900 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. DOE
Fujita, Incorporated, has no debt outstanding and a total market value of $308,100. Earnings before interest and taxes, EBIT, are projected to be $46,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $160,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,900 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. DOE
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
Related questions
Question
Nikul
Transcribed Image Text:Fujita, Incorporated, has no debt outstanding and a total market value of $308,100. Earnings before interest and taxes, EBIT, are
projected to be $46,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent
higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $160,000 debt issue with an interest
rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,900 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
: 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
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.
7.83 %
11.35 %
13.62 x %
-31.00✔ %
20.00 %
12.18 %
19.50 X %
24.22 X %
-37.53✓ %
24.21 %
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
b-2. Recession percentage change in ROE
Expansion percentage change in ROE
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education