Chapter Sixteen

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$\begin{array}{cc}\text{e}\text{B}\text{o}\text{o}\text{k}& \text{H}\text{i}\text{n}\text{t}\\ \text{P}\text{r}\text{i}\text{n}\text{t}& \text{R}\text{e}\text{f}\text{e}\text{r}\text{e}\text{n}\text{c}\text{e}\text{s}\end{array}$

Fujita, Incorporated, has no debt outstanding and a total market value of $$369,600.$ Earnings before interest and taxes, EBIT, are projected to be $$51,000$ if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be $15$ percent higher. If there is a recession, then EBIT will be $24$ percent lower. The company is considering a $$185,000$ debt issue with an interest rate of $6$ percent. The proceeds will be used to repurchase shares of stock. There are currently $8,400$ shares outstanding. Ignore taxes for questions $($a$)$ and $($b$).$ Assume the company has a marketto$-$book ratio of $1\mathrm{.}0$ 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. $($Do not round intermediate calculations and enter your answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

a$-2.$ Calculate the percentage changes in ROE when the economy expands or enters a recession. $($A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$-1.$ Assume the firm goes through with the proposed recapitalization. Calculate the return on equity $($ROE$)$ under each of the three economic scenarios. $($Do not round intermediate calculations and enter your answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$-2.$ Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a recession. $($A necative answer should be indicated bv a minus sian. Do not round intermediate

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$4$Fujita, Incorporated, has no debt outstanding and a total market value of $$369,600.$

Earnings before interest and taxes, EBIT, are projected to be $$51,000$ if economic

conditions are normal. If there is strong expansion in the economy, then EBIT will be $15$

percent higher. If there is a recession, then EBIT will be $24$ percent lower. The

company is considering a $$185,000$ debt issue with an interest rate of $6$ percent. The

proceeds will be used to repurchase shares of stock. There are currently $8,400$ shares

outstanding. Ignore taxes for questions $($a$)$ and $($b$).$ Assume the company has a market$-$

to$-$book ratio of $1\mathrm{.}0$ 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. $($Do not round intermediate calculations and enter your

answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

a$-2.$ Calculate the percentage changes in ROE when the economy expands or enters a

recession. $($A negative answer should be indicated by a minus sign. Do not round

intermediate calculations and enter your answers as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.)$

b$-1.$ Assume the firm goes through with the proposed recapitalization. Calculate the

return on equity $($ROE$)$ under each of the three economic scenarios. $($Do not round

intermediate calculations and enter your answers as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.)$

b$-2.$ Assume the firm goes through with the proposed recapitalization. Calculate the

percentage changes in ROE when the economy expands or enters a recession. $($A

neaative answer should be indicated bv a minus sian. Do not round intermediateFujita, Incorporated, has no debt outstanding and a total market value of $$369,600.$

Earnings before interest and taxes, EBIT, are projected to be $$51,000$ if economic

conditions are normal. If there is strong expansion in the economy, then EBIT will be $15$

percent higher. If there is a recession, then EBIT will be $24$ percent lower. The

company is considering a $$185,000$ debt issue with an interest rate of $6$ percent. The

proceeds will be used to repurchase shares of stock. There are currently $8,400$ shares

outstanding. Ignore taxes for questions $($a$)$ and $($b$).$ Assume the company has a market$-$

to$-$book ratio of $1\mathrm{.}0$ 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. $($Do not round intermediate calculations and enter your

answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

a$-2.$ Calculate the percentage changes in ROE when the economy expands or enters a

recession. $($A negative answer should be indicated by a minus sign. Do not round

intermediate calculations and enter your answers as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.$