Solve this financial accounting problem Mercury Corp. has no debt outstanding and a total market value of$350,000. Earnings before interest and taxes (EBIT) are projected to be$60,000 if economic conditions are normal. If there is a strong expansionin the economy, then EBIT will be 22% higher. If there is a recession, thenEBIT will be 28% lower. The company is considering a $180,000 debt issuewith an interest rate of 7%. The proceeds will be used to repurchase sharesof stock. There are currently 9,000 shares outstanding. Ignore taxes forquestions a) and b). Assume the company has a market-to-book ratio of1.0 and the stock price remains constant.Required: Calculate return on equity (ROE) under each of the threeeconomic scenarios before any debt is issued.

Explanation of Return on Equity (ROE):Return on Equity (ROE) is a financial ratio that measures a…

Answered: Mercury Corp. has no debt outstanding…

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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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. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Note: 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. Note: A negative answer should be indicated by a minus sign. Do…
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