Question

Assume the firm has a tax rate of 22 percent. c-1.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.)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 and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)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 and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)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 and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

From the attached excel file, we have:

a-1. We have:

ROE under recession = 10.43%

ROE under normal = 13.21%

ROE under expansion = 14.92%

a-2. We have:

Percentage changes in ROE when the economy enters a recession = -21.00%

Percentage changes in ROE when the economy expands = 13.00%

b-1. We have:

ROE under recession = 15.63%

ROE under normal = 21.06%

ROE under expansion = 24.42%

b-2. We have:

Percentage changes in ROE when the economy enters a recession = -25.77%

Percentage changes in ROE when the economy expands = 15.95%

c-1. We have:

ROE under recession = 8.14%

ROE under normal = 10.30%

ROE under expansion = 11.64%

c-2. We have:

Percentage changes in ROE when the economy enters a recession = -21.00%

Percentage changes in ROE when the economy expands = 13.00%

c-3. We have:

ROE under recession = 12.19%

ROE under normal = 16.43%

ROE under expansion = 19.05%

c-4. We have:

Percentage changes in ROE when the economy enters a recession = -25.77%

Percentage changes in ROE when the economy expands = 15.95%

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question. Kindly see the attached pdf file for the complete question.

Also note: See the attached excel file for all the calculations required.

In the attached excel file, the following formula is used:

Percentage in ROE = ((ROE of Recession or Expansion - ROE of Normal) / ROE of Normal) * 100

Download xlsx

<span class="sg-text sg-text--link sg-text--bold sg-text--link-disabled sg-text--blue-dark"> xlsx

<span class="sg-text sg-text--link sg-text--bold sg-text--link-disabled sg-text--blue-dark"> pdf