Question

Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and 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.) c-2. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (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.)

Answer 1

Answer:

Explanation:

Dear student, this question is incomplete, and the beginning missing part is attached in the image below.

From the information attached below,

The market value             90000

No of shares                        3600

Debt expected to be

increased                           34000    

Tax rate                                 0.35

                                                                   Expansion     Recession

EBIT                                       8000             9600              5600

ROE = $\dfrac{Net \ income }{Equity}$                   5.8%               6.9%               4.0%

% Change in ROE with

expansion and recession                              20%                 -30%

Stocks are offset by debt of equal liquidity in the current capital structure.

Therefore;

Debt                                         34000          Interest            6%

Equity is (market value -

debt expected to be raised)  56000

The net income is:

= (EBIT - Interest) (1 -tax)           3874            4914             2314

The new ROE = $\dfrac{Net \ income }{Equity}$        6.9%         8.8%                4.1%

% Change in ROE with

expansion and recession                               27%                -40%