Answer:
c-1. ROE under Recession = 8.34%; ROE under Normal = 10.82%; and ROE under Expansion = 12.71%.
c-2. % change in ROE under Recession = -22.91%; and % change in ROE under Expansion = 17.46%.
c-3. ROE under Recession = 10.82%; ROE under Normal = 14.67%; and ROE under Expansion = 17.51%.
c-4. % change in ROE under Recession = -26.23%; and % change in ROE under Expansion = 19.41%
Explanation:
c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Note: See part 1 of the attached excel file for the calculations of Net Income, Shareholders' Equity, and return on equity (ROE) under each of the three economic scenarios before any debt is issued.
In the attached excel file, return on equity (ROE) is calculated using the following formula:
ROE = (Net income / Shareholders' Equity) * 100
After applying the ROE formula, the following are then obtained:
ROE under Recession = 8.34%
ROE under Normal = 10.82%
ROE under Expansion = 12.71%
c-2. 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. Enter your answers as a percent rounded to the nearest whole number, e.g., 32.)
Note: See part 1 of the attached excel file for the calculations of the percentage changes in ROE when the economy expands or enters a recession.
In the attached excel file, percentage changes in ROE is calculated as follows:
Percentage change in ROE = (ROE under recession/expansion - ROE under Normal) / ROE under Normal
After applying the Percentage change in ROE formula, the following are then obtained:
% change in ROE under Recession = -22.91%
% change in ROE under Expansion = 17.46%
c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Note: See part 2 of the attached excel file for the calculations of Net Income, Shareholders' Equity, and return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
In the attached excel file, return on equity (ROE) is calculated using the following formula:
ROE = (Net income / Shareholders' Equity) * 100
After applying the ROE formula, the following are then obtained:
ROE under Recession = 10.82%
ROE under Normal = 14.67%
ROE under Expansion = 17.51%
c-4. Given the 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. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Note: See part 2 of the attached excel file for the calculations of the percentage changes in ROE when the economy expands or enters a recession.
In the attached excel file, percentage changes in ROE is calculated as follows:
Percentage change in ROE = (ROE under recession/expansion - ROE under Normal) / ROE under Normal
After applying the Percentage change in ROE formula, the following are then obtained:
% change in ROE under Recession = -26.23%
% change in ROE under Expansion = 19.41%