Problem $16-3$ ROE and Leverage $[$LO$1,2]$

Fujita, Incorporated, has no debt outstanding and a total market value of $$308,100.$

Eamings before interest and taxes, EBIT, are projected to be $$46,000$ 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 $31$ percent lower. The company is

considering a $$160\mathrm{.}000$ debt issue with an interest rate of $5$ percent. The proceeds will

be used to repurchase shares of stock. There are currently $7,900$ 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 Intermedlate 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 Indleated by a minus sign. Do not round

Intermedlate 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

Intermedlate 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

negatlve answer should be Indleated by a minus sign. Do not round Intermedlate

calculatlons and enter your answers as a percent rounded to $2$ decimal places,

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