c-1. Calculate return on equity (ROE) under each of the three economicscenarios before any debt is issued. (Do not round intermediatecalculations and enter your answers as a percent rounded to 2 decimalplaces, e.g., 32.16.)c-2. Calculate the percentage changes in ROE when the economy expands orenters a recession. (A negative answer should be indicated by a minussign. Do not round intermediate calculations and enter your answers asa percent rounded to 2 decimal places, e.g., 32.16.)c-3. Calculate the return on equity (ROE) under each of the three economicscenarios assuming the firm goes through with the recapitalization. (Donot round intermediate calculations and enter your answers as apercent rounded to 2 decimal places, e.g., 32.16.)c-4. Given the recapitalization, calculate the percentage changes in ROE whenthe economy expands or enters a recession. (A negative answer shouldbe indicated by a minus sign. Do not round intermediate calculationsand enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.)c-1. Recession ROEc-1. Normal ROEc-1. Expansion ROEc-2. Recession percentage changein ROEc-2. Expansion percentage changein ROEc-3. Recession ROEc-3. Normal ROEc-3. Expansion ROEc-4. Recession percentage changein ROEc-4. Expansion percentage changein ROE%%%%%%%%%% Fujita, Incorporated, has no debt outstanding and a total market value of$450,000. Earnings before interest and taxes, EBIT, are projected to be$57,000 if economic conditions are normal. If there is strong expansion in theeconomy, then EBIT will be 16 percent higher. If there is a recession, then EBITwill be 24 percent lower. The company is considering a $215,000 debt issuewith an interest rate of 8 percent. The proceeds will be used to repurchaseshares of stock. There are currently 9,000 shares outstanding. Ignore taxes forquestions (a) and (b). Assume the company has a market-to-book ratio of 1.0and the stock price remains constant.a-1. Calculate return on equity (ROE) under each of the three economicscenarios before any debt is issued. (Do not round intermediatecalculations and enter your answers as a percent rounded to 2 decimalplaces, e.g., 32.16.)a-2. Calculate the percentage changes in ROE when the economy expands orenters a recession. (A negative answer should be indicated by a minussign. Do not round intermediate calculations and enter your answers asa 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 economicscenarios. (Do not round intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g., 32.16.)b-2. Assume the firm goes through with the proposedrecapitalization. Calculate the percentage changes in ROE when theeconomy expands or enters a recession. (A negative answer should beindicated by a minus sign. Do not round intermediate calculations andenter your answers as a percent rounded to 2 decimal places, e.g.,32.16.)a-1. Recession ROEa-1. Normal ROEa-1. Expansion ROEa-2. Recession percentage change inROEa-2. Expansion percentage change inROEb-1. Recession ROEb-1. Normal ROEb-1. Expansion ROEb-2. Recession percentage change inROEb-2. Expansion percentage change inROEAssume the firm has a tax rate of 25 percent.%%%%%%%%%%

Return on equity (ROE) is the measure of a company's net income divided by its shareholders' equity.…

Answered: Fujita, Incorporated, has no debt…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 14%. Milton also has outstanding debt of $25.57 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ million. (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $ million. (Round to two decimal places.)
Meyer & Co. expects its EBIT to be $78,000 every year forever. The firm can borrow at 7 percent. Meyer currently has no debt, and its cost of equity is 12 percent. If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ 650,000.00|8 What will the value be if the company borrows $103,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ 720,887.25
Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies' economists agree that the probability of the continuation of the current expansion is 70 percent for the next year and the probability of a recession is 30 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $3 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $1.4 million. Steinberg's debt obligation requires the firm to pay $930,000 at the end of the year. Dietrich's debt obligation requires the firm to pay $1.5 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 12 percent. a-1. What is the value today of Steinberg's debt and equity? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g.,…
Ornaments, Inc., is an all-equity firm with a total market value of $652,000 and 31,700 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $93,400 if the economy is normal. If there is a recession, EBIT will be 20 percent lower, and if there is a boom, EBIT will be 30 percent higher. The tax rate is 40 percent. What is the EPS in a recession? $1.77 $2.30 $1.24 $1.41 $2.12
Fowler, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 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 25 percent lower. The firm is considering a debt issue of $60,000 with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. The firm has a tax rate 25 percent. Assume the stock price is constant under all scenarios. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate…
Widget Corp. currently is financed with 10% debt and 90% equity. However, its CFO has proposed that the firm issue new long-term debt and repurchase some of the firm’s common stock. Its advisers believe that the long-term debt would require a before-tax yield of 10%, while the firm’s basic earning power is 14%. The firm’s operating income and total assets will not be affected. The CFO has told the rest of the management team that he believes this move will increase the firm’s stock price. If Widget Corp. proceeds with the recapitalization, which of the following items are also likely to increase? Check all that apply. Basic earning power (BEP) Cost of equity (rs) Net income Cost of debt (rd) Return on assets (ROA)
Payne Products had $2.4 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $2 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 10%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 14% of sales. Payne's tax rate is 35%, a. What is the expected return on equity under each current asset level? Round your answers to two decimal places. Tight policy % 76.77 Moderate policy Relaxed policy 9.04 5.05 1% b. In this problem, we have assumed that the level of expected sales is…
# 5 Fujita, Incorporated, has no debt outstanding and a total market value of $369,600. Earnings before interest and taxes, EBIT, are projected to be $51,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $185,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,400 shares outstanding. The company has a tax rate of 24 percent, a market-to-book ratio of 1.0 before recapitalization, and the stock price changes according to M&M. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A…
Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 70 percent and the probability of a recession is 30 percent. It is projected that the company will generate a total cash flow of $186 million in a boom year and $77 million in a recession. The company's required debt payment at the end of the year is $111 million. The market value of the company's outstanding debt is $84 million. The company pays no taxes. a. What payoff do bondholders expect to receive in the event of a recession? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the promised return on the company's debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the company's debt? (Do not round intermediate calculations and…
Dyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV? Multiple Choice $208,195 $194,561 $536,049 $183,363 $364,858
Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have a basic earning power ratio of 15%. CC will own no securities, so all of its income will be operating income. If it so chooses, CC can finance up to 55% of its assets with debt, which will have an 11% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 40% tax rate on all taxable income, what is the difference between CC's expected ROE if it finances these assets with 55% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places.
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio over the next year is 11 percent. The beta of the company's equity is 1.16. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.40 11.29% %

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