Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Ghost, Inc., has no debt outstanding and a total market value of $251,600. Earnings before interest and taxes, EBIT, are projected to be $41,000 if

image text in transcribed

image text in transcribed

image text in transcribed

image text in transcribed

Ghost, Inc., has no debt outstanding and a total market value of $251,600. Earnings before interest and taxes, EBIT, are projected to be $41,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher If there is a recession, then EBIT will be 26 percent lower. The company is considering a $135,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 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. (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. (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., 3216.) b-1. Assume the firm goes through with the proposed recapitalization. Calculate the return on equity (ROE) under each of the three economic scenarios. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 3216.) 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. (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.) a-1. Recession ROE Normal ROE Expansion ROE -26.001% a-2. Recession percentage change in ROE Expansion percentage change in ROE b-1. Recession ROE Normal ROE Expansion ROE b-2. Recession percentage change in ROE Expansion percentage change in ROE 35.301 % 20.361% 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 c-2. Calculate the percentage changes in ROE when the economy expands or enters a any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g, 32.16.) recession. (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. (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. (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-1. Recession ROE Normal ROE Expansion ROE c-2. Recession percentage change in ROE Expansion percentage change in ROE Recession ROE C-3. Normal ROE Expansion ROE c-4. Recession percentage change in ROE Expansion percentage change in ROE

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Valuation

Authors: James R. Hitchner

4th Edition

1119286603, 978-1119286608

More Books

Students also viewed these Finance questions

Question

Relational Contexts in Organizations

Answered: 1 week ago