Kaelea, Inc., has no debt outstanding and a total market value of $129,000. Earnings before interest and taxes, EBIT, are projected to be $8,700 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. The company is considering a $42,900 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,300 shares outstanding. Assume the company has a market-to-book ratio of 1.0.

Assume the firm has a tax rate of 40 percent.

e. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and 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.)

	ROE
Recession	%
Normal	%
Expansion	%

	%ROE
Recession	%
Expansion	%

f. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (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.)

	ROE
Recession	%
Normal	%
Expansion	%

	%ROE
Recession	%
Expansion	%