Reference no: EM131579108
Kaelea, Inc., has no debt outstanding and a total market value of $57,000. Earnings before interest and taxes, EBIT, are projected to be $8,200 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. The company is considering a $20,700 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 3,800 shares outstanding. Assume the company has a market-to-book ratio of 1.0.
a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion %
b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.) %ΔROE Recession % Expansion % Assume the firm goes through with the proposed recapitalization and no taxes.
c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion %
d. Calculate the percentage changes in ROE for economic expansion and 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.) %ΔROE Recession % Expansion % Assume the firm has a tax rate of 35 percent.
e. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and 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.) ROE Recession % Normal % Expansion % %ΔROE Recession % Expansion %
f. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (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.) ROE Recession % Normal % Expansion % %ΔROE Recession % Expansion %
|
What was the term of the loan
: Will borrowed $6,400 at 5.9% simple interest. The total he owed to repay the loan was $6,492. What was the term of the loan?
|
|
Find the wacc-risk-free rate
: find the WACC. Assume the company's tax rate is 35 percent. Market: 7 percent market risk premium and 3.0 percent risk-free rate.
|
|
What would the cost of equity be if the debt–equity ratio
: What would the cost of equity be if the debt–equity ratio were zero? What would the cost of equity be if the debt–equity ratio were .5?
|
|
What is the security dollar price and yield to maturity
: What is the security’s dollar price, and yield to maturity if the manager purchases the security at the beginning of year 2?
|
|
Each of three economic scenarios after recapitalization
: Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization.
|
|
What is the current price if comparable interest rates
: What is the current price if comparable interest rates (yield to maturities) are 5%?
|
|
What is this bond current yield to maturity
: Currently, the price of a 5 year, $1000 par value, 8% semi-annual coupon bond is $1025.00. What is this bond’s current yield to maturity?
|
|
Seller and buyer of european put option
: Show diagrametically on the same axis, and labelling clearly, the payoff on exiration for both the seller and buyer of a european put option.
|
|
Assume the returns from holding small-company stocks
: Assume the returns from holding small-company stocks are normally distributed.
|