Solve problem 3 in the excel spreadsheet (context in problem 1, attached)

1. EBIT and Leverage [LO1] Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering a $65,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enters a recession. 569 b. Repeat part (a) assuming that the company goes through with recapitalization. What do you observe? 3. ROE and Leverage (LO1, 2] Suppose the company in Problem i has a market-to-book ratio of 1.0 and the stock price remains constant. a. 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, assuming no taxes. b. Repeat part (a) assuming the firm goes through with the proposed recapitalization. c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 21 percent. 3 4 Input Area: 5 6 7 8 9 9 10 No debt TE = MV = $ 185.000 With debt TE = 11 $ 120.000 12 13 14 Output Area: 15 16 Recession Normal Expansion 17 18 a. ROE Change ROE% 19 b. ROE Change ROE % 20 21 22 23 24 25 26 C. No debt No debt, ROE Change ROE % 27 28 29 With debt With debt, ROE Change ROE % 30 31 32 33 34 35