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

Step-by-step 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 =
`(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 =
`(Net \ income )/(Equity)` 6.9% 8.8% 4.1%

% Change in ROE with

expansion and recession 27% -40%