Charny, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. 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. Charny is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for questions a and b. 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. (Round your answers to 2 decimal places; e.g., 32.16) b) Calculate the percentage changes in ROE when the economy expands or enters a recession. (Do not round your intermediate calculations. Negative answers should be indicated by a minus sign.)

A.a) Recession 16.76%, Normal 19.8%, Expansion 29.82% b) Recession -50%, Expansion +27.98%
B.a) Recession 11.76%, Normal 16.8%, Expansion 19.82% b) Recession -30%, Expansion +17.98%
C.a) Recession 11.76%, Normal 16.8%, Expansion 19.82% b) Recession -5.04%, Expansion +3.02%
D.a) Recession 11.76%, Normal 16.8%, Expansion 19.82% b) Recession -30%, Expansion +68.53%