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
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![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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe6460f93-c61e-4e73-969d-e635de6fa95c%2F96463158-50a1-4007-be0c-a9eb84214a9d%2Fbnbbfp_processed.jpeg&w=3840&q=75)
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
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