View the step-by-step solution to:

Ghost. has no debt outstanding and a total market value of $284300. Earnings before interest and taxes, EBIT. are projected to be $44,000 if economic...

Please answer the question and all of its parts. Thank you!ghostly garb 1.png

ghostly garb 1.png

Ghost. Inc.. has no debt outstanding and a total market value of $284300. Earnings
before interest and taxes, EBIT. are projected to be $44,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher.
If there is a recession, then EBIT will be 29 percent lower. The company is considering a
$150,000 debt issue with an interest rate of 7 percent. The proceeds will be used to
repurchase shares of stock. There are currently 7.700 shares outstanding. Ignore taxes
for questions a and b. Assume the company has a marketetoebook ratio of 1.0 and the
stock price remains constant. a-1. b-2. 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.) 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 and enter your answers as a percent rounded to 2
decimal places, e.g., 3216.) Assume the firm goes through with the proposed recapitalization. Calculate the
return on equity (ROE) under each of the three economic scenarios. (Do not round
intermediate calculations and enter your answers as a percent rounded to 2
decimal places, e.g., 3216.) Assume the firm goes through with the proposed recapitalization. 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 and enter your answers as a percent rounded to 2 decimal places,
e.g., 32:16.) a—‘l. Recession ROE ”A
Normal RDE %
Expansion ROE % a—Z. Recession percentage change In ROE %
Expansion percentage change In ROE ”A h-1. Recession ROE %
Normal ROE %
Expansion ROE % b-Z. Recession percentage change In ROE ”A
Expansion percentage change In ROE %

Top Answer

a-1) Recession = 10.97%, Normal = 15.44%, Expansion =... View the full answer

Sign up to view the full answer

Other Answers

a1). Recession ROE = 10.97% Normal ROE = 15.44% Expansion ROE = 18.22% a2). Recession %... View the full answer

1 comment
  • Here calculation of % change in ROE is taking normal ROE % as base.
    • karanguju
    • Dec 02, 2018 at 7:14am

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online