Rickett, Inc. has no debt outstanding and a total market value of $173,000. Earn

Question

Rickett, Inc. has no debt outstanding and a total market value of $173,000. Earning before interest and taxes, EBIT, are projected to be $16,000 if economic conditions are normal. If there is strong expansion in the economy, the EBIT will be 34.5 percent higher. If there is a recession, then EBIT will be 69 percent lower. Rickett is considereing a $69,000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,000 shares outstanding. Rickett has a market-to-book of 1.0. The firm has a tax rate of 35 percent.

(a) Return on equity, ROE, for the recession, normal, and expansion scenarios before any debt is issued are ____ percent, _____ percent, and _____ percent, respectively (round to 2 decimal places) If the economy enters a recession or expands, ROE will change by _____ percent or _______percent, resprectively. (negative amount should be indicated with minus sign, round to 2 decimals)

(b) Now assume that Rickett goes through with the proposed recapitaliztion. Return on equity, ROE, for the recession, normal, and expansion scenarios are _____ percent, ______ percent, and ______ percent, respectively. If the economy enteres a recession or expands, ROE will change by ______ percent or _______ percent, respectively. (negative amount should be indicated by a minus sign, round to 2 decimal places)

Explanation / Answer

Hi,

Please find the answer as follows;

Part A:

Part B:

Thanks.

Recession Normal Expansion EBIT 4960 16000 21520 Interest 0 0 0 Tax 1736 5600 7532 Net Income 3224 10400 13988 ROE = Net Income/173000 (Part A) 1.86% 6.01% 8.09% % Change in ROE (Part B) -69.00% 0 34.50

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.