Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earm
ID: 2782846 • Letter: K
Question
Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earmings before interest and taxes, EBIT, are project the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $42,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Assume Kaelea has a ed to be $10,400 if economic conditions are normal, lf there is strong expansion in market-to-book ratio of 1.0. (a) Calculate return on equity, ROE, under each of the three economic sce arios before any debt is issued, assuming no taxes. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) (b) Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Expansion Requirement 2 Assume the fim goes through with the proposed recapitalization and no taxes. (a) Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g. 32.16).) ROE Recession NormalExplanation / Answer
Here, ROE = Profits / Equity
Before recap, equity = 125,000
After recap, equity = 125,000 - 42,000 = 83,000
Kaelea Recession Normal Expansion EBIT 6760 10400 12480 ROE 5.41% 8.32% 9.98% % Change -35.00% 20.00% With Debt EBIT 6760 10400 12480 Interest 2520 2520 2520 Profits 4240 7880 9960 ROE 5.11% 9.49% 12.00% % Change -46.19% 26.40%Related Questions
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