Music City, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 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. The company is considering a $80,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 15,000 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.(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%

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 the nearest whole number, e.g., 32.)

% change in ROE

Recession%

Expansion%

Assume the firm goes through with the proposed recapitalization.

b-1.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., 32.16.)

ROE

Recession%

Normal%

Expansion%

b-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., 32.16.)

% 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.(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%

c-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 the nearest whole number, e.g., 32.)

% 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.(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%

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.)

% change in ROE

Recession%

Expansion%