1-Pendergast, Inc., has no debt outstanding, and has a total market value of $180,000.Earnings before interest and taxes (EBIT) are projected to be $23,000 if economic conditions are normal.If there is a strong expansion in the economy, then EBIT will be 20% higher.If there is a recession, then EBIT will be 30% lower.Pendergast is considering a $75,000 debt issue with a 7% interest rate.The proceeds will be used to repurchase shares of stock.There are currently 6,000 shares of stock outstanding, and the relevant tax rate is 35%.

a-Calculate ROE and EPS under each of the economic scenarios before any debt is issued.

b-Repeat part a, assuming that the company goes through with the capitalization.

c-Calculate the percentage changes in EPS when the economy expands or enters a recession.