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QUESTION
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...
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Ghost. Inc.. has no debt outstanding and a total market value of $284300. Earningsbefore interest and taxes, EBIT. are projected to be $44,000 if economic conditions arenormal. 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 torepurchase shares of stock. There are currently 7.700 shares outstanding. Ignore taxesfor questions a and b. Assume the company has a marketetoebook ratio of 1.0 and thestock price remains constant. a-1. b-2. Calculate return on equity (ROE) under each of the three economic scenarios beforeany debt is issued. (Do not round intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the percentage changes in ROE when the economy expands or enters arecession. (A negative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers as a percent rounded to 2decimal places, e.g., 3216.) Assume the firm goes through with the proposed recapitalization. Calculate thereturn on equity (ROE) under each of the three economic scenarios. (Do not roundintermediate calculations and enter your answers as a percent rounded to 2decimal places, e.g., 3216.) Assume the firm goes through with the proposed recapitalization. Calculate thepercentage changes in ROE when the economy expands or enters a recession. (Anegative answer should be indicated by a minus sign. Do not round intermediatecalculations and enter your answers as a percent rounded to 2 decimal places,e.g., 32:16.) a—‘l. Recession ROE ”ANormal 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 ”AExpansion percentage change In ROE %