Question
ROE with explanation please!! ROE.. With explanation PLEASE!!! Beckett, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and
ROE
with explanation please!!
ROE..
With explanation PLEASE!!!
Beckett, Inc., has no debt outstanding and a total market value of $200,000. 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 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Beckett is considering a $65,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.
a1- Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued
a2- Calculate the percentage changes in ROE when the economy expands or enters a recession.
Now Assume the firm goes through with the proposed recapitalization:
b1- Calculate the return on equity (ROE) under each of the three economic scenarios.
b2- Calculate the percentage changes in ROE when the economy expands or enters a recession
Finally, Assume the firm has a tax rate of 35 percent.
c1 - Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued
c2- Calculate the percentage changes in ROE when the economy expands or enters a recession
c3- Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
c4- Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.
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