Fujita, Incorporated, has no debt outstanding and a total market value of $284,900. Earnings before interest and taxes, EBIT, are projected to be $44,000 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 29 percent lower. The company is considering a $150,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,700 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 22 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.