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Fujita, Incorporated, has no debt outstanding and a total market value of $ 3 0 8 , 1 0 0 . Earnings before interest and

Fujita, Incorporated, has no debt outstanding and a total market value of $308,100. Earnings before interest and taxes, EBIT, are projected to be $46,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $160,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,900 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.
Assume the firm has a tax rate of 24 percent.
c-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.
c-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.
c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,32.16.
c-4. Given the 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.
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