Money, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $24,000 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 30 percent lower. Money is considering a $70,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.

a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.

Recession __%, Normal __%, Expansion __%

a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (Assume the firm goes through with the proposed recapitalization.)

% change in ROE

Recession __%, Expansion __%

b-1. Calculate the return on equity (ROE) under each of the three economic scenarios.

Recession __%, Normal __%, Expansion __%

b-2. Calculate the percentage changes in ROE when the economy expands or enters a recession.

% change in ROE

Recession __%, Expansion __%

Assume the firm has a tax rate of 35 percent.

c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.

Recession __%, Normal __%, Expansion __%

c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession.

% change in ROE

Recession __%, Expansion __%

c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.

Recession __%, Normal __%, Expansion __%

c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.

% change in ROE

Recession __%, Expansion __%