Charny Inc. has no debt outstanding and a total market value of $165,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 25% lower. Charny is considering a $60,000 debt issue with an interest rate of 7%. The proceeds will be used to repurchase shares of stock. There are currently 5,500 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0. a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Enter your answer as a percentage rounded to 2 decimal places.) ROE Recession Normal Expansion a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (Do not round intermediate calculations. Negative answers should be indicated by a minus sign. Enter the answers as a percent rounded to the nearest whole number.) % change in ROE Recession Expansion Assume the firm goes through with the proposed recapitalization. b-1. Calculate the return on equity (ROE) under each of the three economic scenarios. (Enter your answer as a percentage rounded to 2 decimal places.) ROE Recession Normal Expansion b-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative answers should be indicated by a minus sign. Enter the answers as a percent rounded to the nearest whole number.) change in ROE Recession Expansion Assume the firm has a tax rate of 35 percent. C-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Round the final answers to 2 decimal places. Do not round intermediate calculations.) ROE Recession Normal Expansion c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (Do not round intermediate calculations. Negative answers should be indicated by a minus sign. Enter the answers as a percent rounded to the nearest whole number.) change in ROE Recession Expansion c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the fim goes through with the recapitalization. (Enter your answer as a percentage rounded to 2 decimal places. Do not round intermediate calculations.) ROE Recession Normal Expansion c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter the answers as a percent rounded to the nearest whole number.) % change in ROE Recession Expansion
