Reference no: EM132995914
Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest andtaxes, EBIT, are projected to be $14,300 if economic conditions are normal. If there is strong expansion inthe economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percentlower. The company is considering a $33,900 debt issue with an interest rate of 6 percent. The proceedswill be used to repurchase shares of stock. There are currently 7,500 shares outstanding.
Assume thecompany has a market-to-book ratio of 1.0 and the stock price remains constant.
Problem 1: Calculate return on equity, ROE, under each of the three economic scenarios before any debt isissued, assuming no taxes.
Problem 2: Calculate the percentage changes in ROE for economic expansion or recession, assuming no taxes.
Problem 3: Calculate return on equity, ROE, under each of the three economic scenarios after therecapitalization.
Problem 4: Calculate the percentage changes in ROE for economic expansion and recession after therecapitalization.
Problem 5: 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.
Problem 6: Calculate return on equity, ROE, under each of the three economic scenarios after therecapitalization. Also, calculate the percentage changes in ROE for economic expansion andrecession, assuming the firm goes through with the proposed recapitalization.
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