Question

Ghost, Inc., has no debt outstanding and a total market value of $450,000. Earnings before interest...

Ghost, Inc., has no debt outstanding and a total market value of $450,000. Earnings before interest and taxes, EBIT, are projected to be $57,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 16 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $215,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 9,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.

  

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.)

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 2 decimal places, e.g., 32.16.)
b-1. Assume the firm goes through with the proposed recapitalization. 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.)
b-2. Assume the firm goes through with the proposed 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.)

Homework Answers

Answer #1
Expansion Normal Recession
EBIT 66,120 57,000 43,320
Less: Interest 0 0 0
EBT 66,120 57,000 43,320
Equity 450,000 450,000 450,000
ROE 14.69% 12.67% 9.63%
a-2 % change
Expansion = 14.69%-12.67% = 2.02%
Recession = -3.04%
b-1
Expansion Normal Recession
EBIT 66,120 57,000 43,320
Less: Interest 17200 17200 17200
EBT 48,920 39,800 26,120
Equity 235,000 235,000 235,000
ROE 20.82% 16.94% 11.11%
b-2 Change
Expansion = 3.88%
Recession = -5.83%
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Ghost, Inc., has no debt outstanding and a total market value of $220,100. Earnings before interest...
Ghost, Inc., has no debt outstanding and a total market value of $220,100. Earnings before interest and taxes, EBIT, are projected to be $38,000 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 23 percent lower. The company is considering a $120,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of...
Ghost, Inc., has no debt outstanding and a total market value of $262,500. Earnings before interest...
Ghost, Inc., has no debt outstanding and a total market value of $262,500. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 16 percent higher. If there is a recession, then EBIT will be 27 percent lower. The company is considering a $140,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of...
Ghost, Inc., has no debt outstanding and a total market value of $273,600. Earnings before interest...
Ghost, Inc., has no debt outstanding and a total market value of $273,600. Earnings before interest and taxes, EBIT, are projected to be $43,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 17 percent higher. If there is a recession, then EBIT will be 28 percent lower. The company is considering a $145,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of...
Ghost, Inc., has no debt outstanding and a total market value of $320,000. Earnings before interest...
Ghost, Inc., has no debt outstanding and a total market value of $320,000. Earnings before interest and taxes, EBIT, are projected to be $47,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 19 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $165,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of...
Ghost, Inc., has no debt outstanding and a total market value of $296,400. Earnings before interest...
Ghost, Inc., has no debt outstanding and a total market value of $296,400. Earnings before interest and taxes, EBIT, are projected to be $45,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 19 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $155,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of...
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest...
RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 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 25 percent lower. RAK is considering a $95,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock....
RAK, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest...
RAK, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $60,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock....
RAK, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest...
RAK, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $30,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $75,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock....
Sunrise, Inc., has no debt outstanding and a total market value of $284,900. Earnings before interest...
Sunrise, Inc., has no debt outstanding and a total market value of $284,900. Earnings before interest and taxes, EBIT, are projected to be $44,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 29 percent lower. The company is considering a $150,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of...
Ghost, Inc., has no debt outstanding and a total market value of $382,500. Earnings before interest...
Ghost, Inc., has no debt outstanding and a total market value of $382,500. Earnings before interest and taxes, EBIT, are projected to be $52,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 23 percent lower. The company is considering a $190,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT