Calculate return on equity under each of three economic

Assignment Help Financial Management

Reference no: EM132058094

RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $40,000 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 $135,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0. Assume the firm has a tax rate of 35 percent.

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

2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.

4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters the recession.

Reference no: EM132058094

Questions Cloud

Sample of sulfur dioxide gas heated : To what temperature was a sample of sulfur dioxide gas heated to if a 500 mL sample initially at a temperature of - 15.0 degrees celsius

Discuss the importance of user technology security education : Discuss the importance of user technology security education within organizations. What topics should be included in security education and training?

Compare the two companies including profitability : Search for a company whose leader used Theory E to drive the changes and another company whose leader used Theory O to drive the changes.

Sodium benzoate solution : Is an aqueous solution of sodium benzoate acidic, what would be ph of a .25M sodium benzoate solution?

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

What is the recognized gain on the sale of the house : Sandra buys a beach house for $299,000 which she uses as her personal vacation home. What is the recognized gain on the sale of the house

Determine the concentration of the koh solution : Determine the concentration of the KOH solution when 35.0 mL of 6.00 mol/L KOH is diluted to 125 mL.

Explain the up-and-coming technologies : Use the Internet to research up-and-coming technologies. Prepare a list of innovations that you believe will occur in the next ten years.

Discuss the importance of recognizing relevant costs : Discuss the importance of recognizing relevant costs in making managerial decisions, such as make or buy, sell or process, acceptance of a special order

User Account

All Pages