Minion, Inc. has no debt outstanding and a total market value of $211,875. Earnings before interests and taxes (EBIT) are projected to be $14,300 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 35 percent lower. The company is considering a $33,900 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,500 shares outstanding. Ignore taxes for this problem.

Solve:

a) Calculate ROE for the all-equity firm under expansion.

b) Calculate ROE for the all-equity firm under recession.

c) Calculate ROE for the firm with debt, under a normal economy.