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Fujita, Incorporated, has no debt outstanding and a total market value of $ 3 3 2 , 1 0 0 : Earnings before interest and
Fujita, Incorporated, has no debt outstanding and a total market value of $ : Earnings before interest and taxes, EBIT, are projected to be $ if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be percent higher. If there is a recession, then EBIT will be percent lower. The company is considering a $ debt issue with an interest rate of percent. The proceeds will be used to repurchase shares of stock. There are currently shares outstanding. Ignore taxes for questions a and b Assume the company has a markettobook ratio of and the stock price remains constant.
a 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 decimal places, eg a 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 decimal places, eg
b 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 decimal places, eg b 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 decimal places, eg
tablea Recession ROE,,
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