# Question

Suppose the company in problem 16.1 has a market-to-book ratio of 1.0.

a. Calculate 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.

b. Repeat (a) assuming the firm goes through with the proposed recapitalization.

c. Repeat (a) and (b) of this problem assuming the firm has a tax rate of 35 percent.

a. Calculate 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.

b. Repeat (a) assuming the firm goes through with the proposed recapitalization.

c. Repeat (a) and (b) of this problem assuming the firm has a tax rate of 35 percent.

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