Question

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 $32,000 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 30 percent lower. RAK is considering a $75,000 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.

A-1

Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (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-1

Assume the firm goes through with the proposed recapitalization.

Calculate the return on equity (ROE) under each of the three economic scenarios.

ROE
  Recession %  
  Normal %  
  Expansion %  

Homework Answers

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
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....
Kaelea, Inc., has no debt outstanding and a total market value of $57,000. Earnings before interest...
Kaelea, Inc., has no debt outstanding and a total market value of $57,000. Earnings before interest and taxes, EBIT, are projected to be $8,200 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. The company is considering a $20,700 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 $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....
Kaelea, Inc., has no debt outstanding and a total market value of $63,000. Earnings before interest...
Kaelea, Inc., has no debt outstanding and a total market value of $63,000. Earnings before interest and taxes, EBIT, are projected to be $8,600 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 percent higher. If there is a recession, then EBIT will be 34 percent lower. The company is considering a $21,300 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of...
Kaelea, Inc., has no debt outstanding and a total market value of $100,000. Earnings before interest...
Kaelea, Inc., has no debt outstanding and a total market value of $100,000. Earnings before interest and taxes, EBIT, are projected to be $8,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $35,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of...
Pendergast, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest...
Pendergast, Inc., has no debt outstanding and a total market value of $220,000. 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 20 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $66,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock....
Money, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest...
Money, Inc., has no debt outstanding and a total market value of $220,000. 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 20 percent higher. If there is a recession, then EBIT will be 30 percent lower. Money is considering a $66,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock....
Afro, Inc., has no debit outstanding and a total market value of $150,000. Earnings before interest...
Afro, Inc., has no debit outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 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 30 percent lower. The company is considering a $75,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of...
Sunrise, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest...
Sunrise, 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. The company 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...