Fujita, Incorporated, has no debt outstanding and a total market value of $382,500. Earnings before interest and taxes, EBIT, are projected to be $52,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 23 percent lower. The company is considering a $190,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,500 shares outstanding. The company has a tax rate of 25 percent, a market-to-book ratio of 1.0, and the stock price remains constant.

a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.

Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.

a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.

Note: 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.

b-1. Calculate earnings per share, EPS, under each of the three economic scenarios assuming the company goes through with recapitalization.

Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.

b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

Note: 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.

Fujita, Incorporated, has no debt outstanding and a total market value of $230,400. Earnings before interest and taxes, EBIT, are projected to be $39,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $125,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,200 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.

a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued.

Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.

a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession.

Note: 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.

b-1. Assume the firm goes through with the proposed recapitalization. Calculate the return on equity, ROE, under each of the three economic scenarios.

Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.

b-2. Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a recession.

Note: 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.