Economic scenarios before debt is issued-assuming no taxes

Assignment Help Financial Management

Reference no: EM131617209

Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 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 -31 %

Expansion 24 %

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 %

Reference no: EM131617209

Questions Cloud

Raise large sum of money in short period of time : What other options does a company have to raise a large sum of money in a short period of time?

Explain the circumstances and details of the federal case : Then, explain the circumstances and details of the federal case tracing the chronological events from lowest possible level to the U.S. Supreme Court.

Problem related to the heat loss : Water is boiling in a 12-cm-deep pan with an outer diameter of 25 cm that is placed on top of a stove. The ambient air and the surrounding surfaces.

Use the treasury bill yield at the risk-free rate : Why do we usually use the Treasury bill yield at the risk-free rate?

Economic scenarios before debt is issued-assuming no taxes : Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes.

Determine the rate of heat transfer from the stack : Flue gases from an incinerator are released to atmosphere using a stack that is 0.6 m in diameter and 10.0 m high. The outer surface of the stack is at 40°C.

What is the company new cost of equity : What is the company’s new cost of equity? What is its new WACC?

Determine heat transfer rate from the can surface : A can of engine oil with a length of 150 mm and a diameter of 100 mm is placed vertically in the trunk of a car.

Determine the temperature at the interface of the wire : A 3-mm-diameter and 12-m-long electric wire is tightly wrapped with a 1.5-mm-thick plastic cover whose thermal conductivity and emissivity are k = 0.20 W/m.

User Account

All Pages