General accounting Minion, Inc., has no debt outstanding and a total market valueof $296,400. Earnings before interest and taxes, EBIT, areprojected to be $45,000 if economic conditions are normal. Ifthere is a strong expansion in the economy, then EBIT will be 19percent higher. If there is a recession, then EBIT will be 30percent lower. The company is considering a $155,000 debtissue with an interest rate of 8 percent. The proceeds will beused to repurchase shares of stock. There are currently 7,800shares outstanding. Ignore taxes for questions a) and b). Assumethe company has a market-to-book ratio of 1.0 and the stockprice remains constant.Calculate return on equity, ROE, under each of the threeeconomic scenarios before any debt is issued.

Step 1: Define Return on Equity (ROE)ROE is a profitability ratio that measures a company's ability…

Answered: Minion, Inc., 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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