Worksheet Difficulty: 1 Basic Section: 14.5 Taxes Assume the firm has a tax rate of 35 percent c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is decimal places, e.g-, 32.16.) Award: 10.00 points ROE Expansion Castle, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A should be indicated by a minus sign. Do not round intermediate calculations. number, e.g-. 32.) and taxes, EBIT, are projected to be $ expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will 8,000 if economic conditions an nter your answers as a percent rounded to the nearest whole e normal. If there is strong 5 percent lower. The firm is considering a debt issue of $48,000 with an interest rate of 4 percent The proceeds will be used to outstanding. Ignore taxes for questions a and b. Assume the stock price remains constant repurchase shares of stock. There are currently 20,000 shares Recession a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. c-3. Calculate the return on equity (ROE) under each of the three economic firm goes through with the recapitalization. (Do not round intermediate Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a percent rounded to 2 decimal places, e.g., 32.16. ROE ROE Recession 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. Enter your arswers as a percent roundod to the nearest whole number, 60-, 32.) c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy or enters a recession. (A negative answer should be indicated by a minus sign. Do not round % change in ROE r your answers as a percent rounded to 2 decimal places, e.g 32.16.) Recession Expansion % change in ROE Assume the firm goes through with the proposed recapitalization b-1. Calculate the return on equity (ROE) under each of the three economic scenarios. (Do not round ntermediate calculations. Enter your answers as a percent 32.16.) Hints ROE Normal Expansion References Section: 14.3 Financial Leverage and Firm Value: An Example Calculate the percentage changes in ROE when the economy expands or enters a recession. (A Difficulty: 1 Basic b-2. negativ Enter your answers Worksheet e answer should be indicated by a minus sign. Do not round intermediate calculations as a percent rounded to 2 decimal places, e.g., 32.16.) % change in ROE