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

Honeycrisp, Incorporated, has no debt outstanding and a total market value of $$296,400.$ Earnings before interest and taxes, EBIT, are projected to be $$45,000$ if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be $19$ percent higher. If there is a recession, then EBIT will be $30$ percent lower. The company is considering a $$155,000$ debt issue with an interest rate of $8$ percent. The proceeds will be used to repurchase shares of stock. There are currently $7,800$ 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.

Note: 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.

Note: 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.

Note: 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.

Note: 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$.,32\mathrm{.}16.$

Assume the firm has a tax rate of $23$ percent.

c$-1.$ Calculate return on equity $($ROE$)$ under each of the three economic scenarios before any debt is issued.