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 %