RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 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 20 percent lower. RAK is considering a $120,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes for questions a and b. Assume 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. Answer as a percent rounded to 2 decimal places, example is like 20%

	ROE
Recession	%
Normal	%
Expansion	%

a-2	Calculate the percentage changes in ROE when the economy expands or enters a recession. Write your answers as a percent rounded to 2 decimal places,

	% 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. 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. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. 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. Round to 2 decimal places. Enter as a percent.

	ROE
Recession	%
Normal	%
Expansion	%

c-2	Calculate the percentage changes in ROE when the economy expands or enters a recession. Enter as a percent rounded to two decimals

	% 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. 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. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

	% change in ROE
Recession	%
Expansion	%