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 the economy, then EBIT will be 16 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $215,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 9,000 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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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**Instructions for Calculating ROE:**

c-1. **Calculate Return on Equity (ROE)** for each of the three economic scenarios before any debt is issued. **Do not round intermediate calculations.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%).

c-2. **Calculate 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.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%).

c-3. **Calculate ROE** under each of the three economic scenarios assuming the firm goes through with the recapitalization. **Do not round intermediate calculations.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%).

c-4. **Calculate Percentage Changes in ROE** with recapitalization when the economy expands or enters a recession. A negative answer should be indicated by a minus sign. **Do not round intermediate calculations.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%).

**Data Table:**

- c-1. Recession ROE: _____ %
- c-1. Normal ROE: _____ %
- c-1. Expansion ROE: _____ %

- c-2. Recession Percentage Change in ROE: _____ %
- c-2. Expansion Percentage Change in ROE: _____ %

- c-3. Recession ROE: _____ %
- c-3. Normal ROE: _____ %
- c-3. Expansion ROE: _____ %

- c-4. Recession Percentage Change in ROE: _____ %
- c-4. Expansion Percentage Change in ROE: _____ % 

Ensure all calculations adhere to the specified guidelines and rounding rules.
Transcribed Image Text:**Instructions for Calculating ROE:** c-1. **Calculate Return on Equity (ROE)** for each of the three economic scenarios before any debt is issued. **Do not round intermediate calculations.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%). c-2. **Calculate 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.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%). c-3. **Calculate ROE** under each of the three economic scenarios assuming the firm goes through with the recapitalization. **Do not round intermediate calculations.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%). c-4. **Calculate Percentage Changes in ROE** with recapitalization when the economy expands or enters a recession. A negative answer should be indicated by a minus sign. **Do not round intermediate calculations.** Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16%). **Data Table:** - c-1. Recession ROE: _____ % - c-1. Normal ROE: _____ % - c-1. Expansion ROE: _____ % - c-2. Recession Percentage Change in ROE: _____ % - c-2. Expansion Percentage Change in ROE: _____ % - c-3. Recession ROE: _____ % - c-3. Normal ROE: _____ % - c-3. Expansion ROE: _____ % - c-4. Recession Percentage Change in ROE: _____ % - c-4. Expansion Percentage Change in ROE: _____ % Ensure all calculations adhere to the specified guidelines and rounding rules.
**Fujita, Incorporated Financial Analysis Exercise**

Fujita, Incorporated, is a company currently with no debt and a total market value of $450,000. The earnings before interest and taxes (EBIT) are projected at $57,000 under normal economic conditions. In scenarios of strong economic expansion, the EBIT is expected to be 16% higher, while during a recession, the EBIT will likely be 24% lower.

**Debt Proposal:**
The company is considering issuing $215,000 of debt at an 8% interest rate. The proceeds will be used to repurchase shares. Currently, there are 9,000 shares outstanding. For this exercise, assume a market-to-book ratio of 1.0, a constant stock price, and disregard taxes for parts (a) and (b).

**Questions:**

**a-1. ROE under Different Economic Scenarios (Prior to Debt Issue):**

Calculate the Return on Equity (ROE) for recession, normal, and expansion scenarios. Provide your answers as percentages, rounded to two decimal places.

**a-2. Percentage Changes in ROE (Economic Fluctuations):**

Calculate the percentage changes in ROE when the economy transitions between different states. Indicate negative changes with a minus sign.

**b-1. ROE under Different Economic Scenarios (Post-Debt Issue):**

Assuming the firm proceeds with the debt issuance and recapitalization, calculate the ROE for each economic scenario. Provide percentages rounded to two decimal places.

**b-2. Percentage Changes in ROE (Economic Fluctuations Post-Recapitalization):**

Calculate the percentage changes in ROE for economic expansions and recessions after the debt issue and recapitalization. Use a minus sign for negative changes.

**Assumption:**
The firm has a tax rate of 25%.

**Table for Answers:**
Fill in the table provided with the calculated ROEs and percentage changes for both scenarios (pre and post-debt issuance and recapitalization).

Note: Detailed calculations and intermediate steps are crucial for understanding the changes in financial metrics due to economic fluctuations and recapitalization activities.
Transcribed Image Text:**Fujita, Incorporated Financial Analysis Exercise** Fujita, Incorporated, is a company currently with no debt and a total market value of $450,000. The earnings before interest and taxes (EBIT) are projected at $57,000 under normal economic conditions. In scenarios of strong economic expansion, the EBIT is expected to be 16% higher, while during a recession, the EBIT will likely be 24% lower. **Debt Proposal:** The company is considering issuing $215,000 of debt at an 8% interest rate. The proceeds will be used to repurchase shares. Currently, there are 9,000 shares outstanding. For this exercise, assume a market-to-book ratio of 1.0, a constant stock price, and disregard taxes for parts (a) and (b). **Questions:** **a-1. ROE under Different Economic Scenarios (Prior to Debt Issue):** Calculate the Return on Equity (ROE) for recession, normal, and expansion scenarios. Provide your answers as percentages, rounded to two decimal places. **a-2. Percentage Changes in ROE (Economic Fluctuations):** Calculate the percentage changes in ROE when the economy transitions between different states. Indicate negative changes with a minus sign. **b-1. ROE under Different Economic Scenarios (Post-Debt Issue):** Assuming the firm proceeds with the debt issuance and recapitalization, calculate the ROE for each economic scenario. Provide percentages rounded to two decimal places. **b-2. Percentage Changes in ROE (Economic Fluctuations Post-Recapitalization):** Calculate the percentage changes in ROE for economic expansions and recessions after the debt issue and recapitalization. Use a minus sign for negative changes. **Assumption:** The firm has a tax rate of 25%. **Table for Answers:** Fill in the table provided with the calculated ROEs and percentage changes for both scenarios (pre and post-debt issuance and recapitalization). Note: Detailed calculations and intermediate steps are crucial for understanding the changes in financial metrics due to economic fluctuations and recapitalization activities.
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