$1.$ EBIT and Leverage Beckett, Inc., has no debt outstanding and a total market value of $$250,000.$

Earnings before interest and taxes, EBIT, are projected to be $$13,000$ if economic conditions

are normal. If there is strong expansion in the economy, then EBIT will be $35$ percent higher. If

there is a recession, then EBIT will be $40$ percent lower. Beckett is considering an $$80,000$ debt

issue with a $6$ percent interest rate. The proceeds will be used to repurchase shares of stock.

There are currently $4,000$ shares outstanding. Ignore taxes for this problem.

a$.$ Calculate earnings per share, EPS, under each of the three economic scenarios before any

debt is issued. Also, calculate the percentage changes in EPS when the economy expands or

enters a recession.

b$.$ Repeat part $($a$)$ assuming that Beckett goes through with recapitalization. What do you

observe? $3.$ ROE and Leverage Suppose the company in Problem $1$ has a market$-$to$-$book ratio of $1\mathrm{.}0.$

a$.$ 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, assuming no taxes.

b$.$ Repeat part $($a$)$ assuming the fi rm goes through with the proposed recapitalization.

c$.$ Repeat parts $($a$)$ and $($b$)$ of this problem assuming the fi rm has a tax rate of $35$ percent.