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Economic condition with and without the debt issue

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Reference no: EM131428939

CSUSB, Inc., has no debt outstanding and a total market value of $250,000. Earningsbefore interest and taxes, EBIT, are projected to be $42,000 if economic conditions arenormal. If there is strong expansion in the economy, then EBIT will be 18 percent higher.If there is a recession, then EBIT will be 30 percent lower. The firm is considering a$100,000 debt issue with an interest rate of 8 percent. The proceeds will be used torepurchase shares of stock. There are currently 10,000 shares outstanding.

  • What is EPS under each economic condition with and without the debt issue?
  • How much does EPS grow in an expansion with and without the debt issue?
  • What is the firm's ROE under each economic condition with and without the debt issue?
  • Suppose the firm has a 35% tax rate, now what is the firm's ROE under each economiccondition with and without the debt issue?

Reference no: EM131428939

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