Minion, Inc., has no debt outstanding and a total market value of $296,400. Earnings before interest and taxes, EBIT, are projected to be $45,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 19 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $155,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,800 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. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued.

Minion, Inc., has no debt outstanding and a total market value of $296,400. Earnings before interest and taxes, EBIT, are projected to be $45,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 19 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $155,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,800 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. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter7: Analysis Of Financial Statements

Section: Chapter Questions

Problem 10P: The Morrit Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8%...

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