Rickett Inc. has no debt outstanding and a total market value of $173000. Earning before interest and taxes EBIT are projected to be $16000 if economic
conditions are normal. If there is strong expansion in the economy the EBIT will be 34.5 percent higher. If there is a recession then EBIT will be 69 percent
lower. Rickett is considereing a $69000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are
currently 3000 shares outstanding. Rickett has a market-to-book of 1.0. The firm has a tax rate of 35 percent.
(a) Return on equity ROE for the recession normal and expansion scenarios before any debt is issued are ____ percent _____ percent and _____ percent
respectively (round to 2 decimal places) If the economy enters a recession or expands ROE will change by _____ percent or _______percent resprectively.
(negative amount should be indicated with minus sign round to 2 decimals)
(b) Now assume that Rickett goes through with the proposed recapitaliztion. Return on equity ROE for the recession normal and expansion scenarios are _____
percent ______ percent and ______ percent respectively. If the economy enteres a recession or expands ROE will change by ______ percent or _______ percent
respectively. (negative amount should be indicated by a minus sign round to 2 decimal places)