Firm goes through with the proposed recapitalization

Assignment Help Financial Management

Reference no: EM131820111

Music City, Inc., has no debt outstanding and a total market value of $300,000. Earnings before interest and taxes, EBIT, are projected to be $60,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering an $100,000 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 this problem.

Suppose the company has a market-to-book ratio of 1.0.

Part A) 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, assuming no taxes.

Part B) Repeat A) assuming the firm goes through with the proposed recapitalization.

Part C) Repeat A and B above assuming the firm has a tax rate of 35 percent.

Reference no: EM131820111

Questions Cloud

His employees and evaluate the different retirement plans : his employees and evaluate the different retirement plans available to Jonathan and recommend appropriate choices.

Analyze the meaning of each of the langley company ratios : Analyze the meaning of each of the Langley Company ratios above. State which company performed better for each ratio.

How much cash must peterson pay to retire the bonds payable : Retiring bonds payable before maturity On January 1, 2016, Peterson issued $150,000 of 9%, five-year bonds payable at 103.

What kind of a doctor is dr jones : Dr. Jones uses slightly different words to describe the scientific method to a general (non-scientific) audience. What are the terms that he uses?

Firm goes through with the proposed recapitalization : Assuming the firm goes through with the proposed recapitalization.

Single-elimination tournament : A single-elimination tournament with four players is to be held. In Game 1, the players seeded (rated) first and fourth play. In Game 2, the players

Are running rivers operating costs variable fixed or mixed : The company has begun preparation for the following year's budget and needs to determine how the club's costs behave in order to make accurate projections

Calculate the present value of each scenario : Calculate the present value of each scenario using an 8% discount rate. Which scenario yields the highest present value?

Record necessary journal entries and prepare balance sheet : Record necessary journal entries and prepare balance sheet of a company.

User Account

All Pages