Problem 16-3 ROE and Leverage [LO1, 2]Fujita, Incorporated, has no debt outstanding and a total market value of $356,900.Earnings before Interest and taxes, EBIT, are projected to be $50,000 if economicconditions are normal. If there is strong expansion in the economy, then EBIT will be 16percent higher. If there is a recession, then EBIT will be 25 percent lower. Thecompany is considering a $180,000 debt Issue with an interest rate of 5 percent. Theproceeds will be used to repurchase shares of stock. There are currently 8,300 sharesoutstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.a-1. Calculate return on equity (ROE) under each of the three economic scenarios beforeany debt is issued. (Do not round Intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g., 32.16.)a-2. Calculate the percentage changes in ROE when the economy expands or enters arecession. (A negative answer should be indicated by a minus sign. Do not roundIntermediate calculations and enter your answers as a percent rounded to 2decimal places, e.g., 32.16.)b-1. Assume the firm goes through with the proposed recapitalization. Calculate thereturn on equity (ROE) under each of the three economic scenarios. (Do not roundIntermediate calculations and enter your answers as a percent rounded to 2decimal places, e.g., 32.16.)b-2. Assume the firm goes through with the proposed recapitalization. Calculate thepercentage changes in ROE when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not round Intermediatecalculations and enter your answers as a percent rounded to 2 decimal places,e.g., 32.16.)a-1. Recession ROEa-1. Normal ROEAnswer is complete and correct.a-1. Expansion ROEa-2. Recession percentage change in ROEa-2. Expansion percentage change in ROEb-1. Recession ROEb-1. Normal ROEb-1. Expansion ROEb-2. Recession percentage change in ROEb-2. Expansion percentage change in ROE%10.5114.01 %16.25%-25.00%16.00%16.11 %23.18✔ %27.70 %-30.49%19.51% Assume the firm has a tax rate of 23 percent.c-1. Calculate return on equity (ROE) under each of the three economic scenarios beforeany debt is Issued. (Do not round Intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g., 32.16.)c-2. Calculate the percentage changes in ROE when the economy expands or enters arecession. (A negative answer should be indicated by a minus sign. Do not roundIntermediate calculations and enter your answers as a percent rounded to 2decimal places, e.g., 32.16.)c-3. Calculate the return on equity (ROE) under each of the three economic scenariosassuming the firm goes through with the recapitalization. (Do not roundIntermediate calculations and enter your answers as a percent rounded to 2decimal places, e.g., 32.16.)c-4. Given the recapitalization, calculate the percentage changes in ROE when theeconomy expands or enters a recession. (A negative answer should be indicatedby a minus sign. Do not round Intermediate calculations and enter your answersas a percent rounded to 2 decimal places, e.g., 32.16.)Answer is not complete.c-1. Recession ROEc-1. Normal ROEc-1. Expansion ROEc-2. Recession percentage change in ROEc-2. Expansion percentage change in ROEc-3. Recession ROEc-3. Normal ROEc-3. Expansion ROEc-4. Recession percentage change in ROEc-4. Expansion percentage change in ROE-25.0016.00-30.4919.51%%%%%%%%%%

by sign. as a percent rounded to 2 decimal places, e.g., 32.16.) Answer is not complete. c-1. Recession ROE c-1. Normal ROE c-1. Expansion ROE c-2. Recession percentage change in ROE c-2. Expansion percentage change in ROE c-3. Recession ROE c-3. Normal ROE c-3. Expansion ROE c-4. Recession percentage change in ROE c-4. Expansion percentage change in ROE -25.00 16.00 -30.49 19.51 % % % % % %

by sign. as a percent rounded to 2 decimal places, e.g., 32.16.) Answer is not complete. c-1. Recession ROE c-1. Normal ROE c-1. Expansion ROE c-2. Recession percentage change in ROE c-2. Expansion percentage change in ROE c-3. Recession ROE c-3. Normal ROE c-3. Expansion ROE c-4. Recession percentage change in ROE c-4. Expansion percentage change in ROE -25.00 16.00 -30.49 19.51 % % % % % %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

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5. Problem 14.07 (Financial Leverage Effects) The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $19 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 25%. Neal is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The CFO has estimated next year's EBIT for three possible states of the world: $4.8 million with a 0.2 probability, $3.5 million with a 0.5 probability, and $700,000 with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places. Debt/Capital ratio is 0. RÔE: O: CV: RÔE: Debt/Capital ratio is 10%, interest rate is 9%. RÔE: eBook O:…
Problem 16-3 ROE and Leverage [LO1, 2] Fujita, Incorporated, has no debt outstanding and a total market value of $408,900. Earnings before Interest and taxes, EBIT, are projected to be $54,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 21 percent lower. The company is considering a $200,000 debt Issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,700 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 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.. 32.16.) a-2. Calculate the percentage changes in ROE when the economy expands or enters a…
Current Answers are incorrect Problem 16-2 EBIT, Taxes, and Leverage [LO2] Ghost, Inc., has no debt outstanding and a total market value of $395,600. Earnings before interest and taxes, EBIT, are projected to be $53,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 22 percent lower. The company is considering a $195,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,600 shares outstanding. The company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or…
1. EBIT and Leverage Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 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. Assume the stock price is constant under all scenarios. 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 b. Repeat part (a) assuming that the company goes through with recapitalization. What do you observe? 2. EBIT, Taxes, and Leverage Repeat parts (a) and (b) in Problem 1 assuming the…
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QUESTION 1 Ghost, Inc., has no debt outstanding and a total market value of $422,400. Earnings before interest and taxes, EBIT, are projected to be $55,000 if economic conditions are nomal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. The company has a tax rate of 23 percent, a market-to-book ratio of 1.0, and the stock price remains constant. Calculate eamings per share (EPS) under the situation of recession. O 1.3.85 O 2.5.49 O 3.6.82 O 4.4.81
Taxes and WACC [LO3] Sixx AM Manufacturing has a target debt-equity ratio of 0.65. Its cost of equity is 15 percent, and its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company's WACC?
# 5 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. The company has a tax rate of 24 percent, a market-to-book ratio of 1.0 before recapitalization, and the stock price changes according to M&M. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A…
which one is correct please confirm? QUESTION 20 Kermit's Hardware's (KH) fixed operating costs are $20.8 million, and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million, and its marginal tax rate is 40%. Compute KH's degree of financial leverage. a. 1.22 b. 1.09 c. 2.07 d. 1.04
• Exercise 13.3 P416-445 a. Calculate the price of a firm with a plowback ratio of .60 if its ROE is 20%. Current earnings E., will be $5 per share, and k = 12.5%. b. What if ROE is 10%, which is less than the market capitalization rate? Compare the firms price in this instance to that of a firm with the same ROE and E, but a plowback ratio of b=0.