Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest and
Question:
Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest and taxes, EBIT, are projected to be $14,300 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 35 percent lower. The company is considering a $33,900 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,500 shares outstanding. 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, assuming no taxes.
a-2. Calculate the percentage changes in ROE for economic expansion or recession, assuming no taxes.
b-1. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization.
b-2. Calculate the percentage changes in ROE for economic expansion and recession after the recapitalization.
Assume the firm has a tax rate of 21 percent.
c-1. 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.
c-2. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization.
Expert Answer:
a1 Calculate return on equity ROE under each of the three economic scenarios before any debt is issued assuming no taxes No Taxes ROE Net Income Stock... View the full answer
